Orkney Islands Council

Annual Audit Report to the Council and Accounts Commission

19 February 2026

IMAGE: Cover page displaying the KPMG logo, the title “Orkney Islands Council”, “Annual Audit Report to the Council and Accounts Commission”, and the date “19 February 2026” on a blue-to-purple gradient background.

Key contacts

Your key contacts in connection with this report are:

• Michael Wilkie — Partner
  Tel: 07795 370106
  Michael.Wilkie@kpmg.co.uk

• Matthew Moore — Senior Manager
  Tel: 07468 369807
  Matthew.moore@kpmg.co.uk

• Taimoor Alam — Manager
  Tel: 07731 348596
  Taimoor.alam@kpmg.co.uk

Contents

• Introduction — 3
• Audit conclusions — 5
• Materiality — 6
• Our audit findings — 7
• Audit risks and our approach — 9
• Key accounting estimates — 15
• Group involvement — 16
• Other significant matters — 17
• Wider Scope and Best Value — 18
• Appendices — 33

Introduction

Purpose of this report

The Accounts Commission has appointed KPMG LLP as auditor of Orkney Islands Council (the Council) under part VII of the Local Government (Scotland) Act 1973 (“the Act”). The period of appointment is 2022-23 to 2026-27, inclusive.

Our annual audit report is designed to summarise our opinions and conclusions on significant issues arising from our audit. It is addressed to both those charged with governance at the Council and the Controller of Audit. The scope and nature of our audit are set out in our audit strategy document dated 3 April 2025.

Audit Scotland’s Code of Audit Practice (“the Code”) sets out the wider dimensions of public sector audit which involves not only the audit of the financial statements but also consideration of wider scope areas. The report incorporates both aspects of the Code.

Accountable officer responsibilities

The Code sets out Orkney Islands Council’s responsibilities in respect of:

• corporate governance;
• financial statements and related reports;
• standards of conduct for prevention and detection of fraud and error;
• financial position; and
• Best Value.

Auditor responsibilities

This report reflects our overall responsibility to carry out an audit in accordance with our statutory responsibilities under the Act and in accordance with International Standards on Auditing (UK) issued by the Financial Reporting Council and the Code.

How we have delivered audit quality

Audit quality is at the core of everything we do at KPMG and we believe that it is not just about reaching the right opinion, but how we reach that opinion. We consider risks to the quality of our audit in our engagement risk assessment and planning discussions.

We define ‘audit quality’ as being the outcome when audits are:

• Executed consistently, in line with the requirements and intent of applicable professional standards within a strong system of quality controls; and
• All of our related activities are undertaken in an environment of the utmost level of objectivity, independence, ethics and integrity.

External auditors do not act as a substitute for the Council’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

Limitations on work performed

This report has been prepared in accordance with the responsibilities set out within the Audit Scotland’s Code of Audit Practice (“the auditing Code”).

This report is for the benefit of Orkney Islands Council and is made available to Audit Scotland and the Controller of Audit (together “the Beneficiaries”). This report has not been designed to be of benefit to anyone except the Beneficiaries. In preparing this report we have not taken into account the interests, needs or circumstances of anyone apart from the Beneficiaries, even though we may have been aware that others might read this report. We have prepared this report for the benefit of the Beneficiaries alone.

Nothing in this report constitutes an opinion on a valuation or legal advice. We have not verified the reliability or accuracy of any information obtained in the course of our work, other than in the limited circumstances set out in the scoping and purpose section of this report.

This report is not suitable to be relied on by any party wishing to acquire rights against KPMG LLP (other than the Beneficiaries) for any purpose or in any context. Any party other than the Beneficiaries that obtains access to this report or a copy (under the Freedom of Information Act 2000, the Freedom of Information (Scotland) Act 2002, through a Beneficiary’s Publication Scheme or otherwise) and chooses to rely on this report (or any part of it) does so at its own risk. To the fullest extent permitted by law, KPMG LLP does not assume any responsibility and will not accept any liability in respect of this report to any party other than the Beneficiaries.

Status of our audit

Our audit is complete.

Audit Conclusions

Audit opinion

We have issued an unqualified opinion on the truth and fairness of the state of the Council’s affairs as at 31 March 2025, and of the results for the year then ended. There are no matters identified, to date, on which we are required to report by exception.

Financial reporting framework, legislation and other reporting requirements

The Council is required to prepare its annual accounts in accordance with International Financial Reporting Standards, as interpreted and adapted by the Code of Practice on Local Authority Accounting in the United Kingdom 2024-25 (“the CIPFA Code”), and in accordance with the Local Authority Accounts (Scotland) Regulations 2014. We confirm that the annual accounts have been prepared in accordance with the CIPFA Code and relevant legislation.

Statutory reports

We have not identified any circumstances, based on work performed till date, to notify the Controller of Audit that indicate a statutory report may be required.

Other communications

We did not encounter any significant difficulties during the audit. There were no other significant matters arising from the audit that were discussed, or subject to correspondence with management that have not been included within this report. There are no other matters arising from the audit, that, in our professional judgement, are significant to the oversight of the financial reporting process.

Materiality – Group and Council

IMAGE: Materiality diagram showing total group expenditure of £248m and total council expenditure of £241m; group materiality of £5.5m and council materiality of £5.3m; and the lower thresholds of £4.1m for the Group and £4.0m for the Council for procedures designed to detect individual errors.

Our materiality levels

We determined materiality for the consolidated financial statements at a level which could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. We used a benchmark of gross expenditure which we consider to be appropriate as it reflects the scale of the Group/Council’s services and we consider this most clearly reflects the interests of users of the Group/Council’s accounts. To respond to aggregation risk from individually immaterial misstatements, we design our procedures to detect misstatements at a lower level of performance materiality. We also adjust this level further downwards for items that may be of specific interest to users for qualitative reasons. We also adjust this level further downwards for items that may be of specific interest to users for qualitative reasons, such as information in the remuneration report.

We have updated the updated materiality levels, based on the 2024-25 draft financial statements, since the last indicative audit plan.

*Based on 2024-25 draft financial statements.
**Based on 2022-23 financial statements.

Our audit findings

Significant audit risks

Other focus area

Please refer to page 15 for key accounting estimates.

Audit misstatements

There are four adjusted audit misstatements, mainly related to balance sheet classification and the application of depreciation. In addition there were some presentational amendments. Page 51.

There are two unadjusted audit misstatements. One unavoidably arises due to the timing of the preparation of draft accounts and the other relates to a difference in professional opinion. Page 52.

Control recommendations

There is one low grade recommendation arising in the current year in respect of the Wider Scope of public audit, related to the strategic planning and performance framework. Page 37.

There is one recommendation arising from our Best Value Thematic review, aligned with a prior year Wider Scope recommendation. This is related to the identified financial pressures within the Council. Page 32.

While consistent with a number of organisations, we continue to be required to recommend implantation of management review controls related to pension assumptions and valuations. Pages 10/12.

Wider Scope and Best Value

The Code of Audit Practice sets out four areas that constitute the wider scope of public audit in Scotland: financial sustainability; financial management; vision, leadership and governance; and use of resources to improve outcomes.

In addition to wider-scope, we are required to report on Best Value as prescribed by the Accounts Commission.

Audit risks and our audit approach

1 Retirement benefit obligations

Significant audit risk

Risk: An inappropriate amount is estimated and recorded for the defined benefit obligation

The valuation of the Local Government Pension Scheme (Orkney Pension Fund) relies on a number of assumptions, most notably around the actuarial assumptions, and actuarial methodology which results in the Council’s overall valuation.

There are financial assumptions and demographic assumptions used in the calculation of the Council’s valuation, such as the discount rate, inflation rates, mortality rates etc. The assumptions should also reflect the profile of the Council’s employees, and should be based on appropriate data. The basis of the assumptions should be derived on a consistent basis year to year, or updated to reflect any changes.

There is a risk that the assumptions and methodology used in the valuation of the Council’s pension obligation are not reasonable. This could have a material impact to net pension liability accounted for in the financial statements.

Pension Funds in surplus pose an additional risk to Councils, as the entity will need to assess the level of surplus that it can recognise. This will need to be assessed each year, and the conclusion can change from one year to the next based on facts and circumstances for each participation.

Our response

We performed the following procedures designed to specifically address the significant risk associated with the valuation:

Control design:

• We evaluated the design and implementation of controls in place for management to review the LGPS valuation and the appropriateness of assumptions used.

Assessing the actuarial expert’s credentials:

• We evaluated the competency and objectivity of the Scheme actuaries, Hymans Robertson, to confirm their qualifications and the basis for their calculations.

Input assessment:

• We reviewed the input from the Council into the calculation of the LGPS valuation; and
• We agreed the data provided by the audited entity to the Scheme Administrator for use within the calculation of the scheme valuation.

Assessing methodology and benchmarking assumptions

• We challenged, with the support of our own actuarial specialists, the key assumptions applied, being the discount rate, inflation rate, salary increases and mortality/life expectancy against externally derived data where appropriate; and
• We confirmed that the accounting treatment and entries applied by the Authority are in line with the requirements of the Code.

Assessing transparency

• Disclosures: We considered the adequacy of the disclosures concerning the key judgements and degree of estimation involved in arriving at the valuation, in addition to disclosures regarding the sensitivity of the Authority’s defined benefit obligation to these assumptions.

Assessing the recognised surplus

• We have considered the level of surplus that the Council has recognised and ensured that the asset recognised met the requirements of the CIPFA code for Local Authority Accounting in 2024-25, and current actuarial interpretation of the Code.

Our findings

Our work is complete for this significant risk.

Our actuarial specialists have evaluated the assumptions applied in measuring the defined benefit liabilities and have found these to be balanced, while remaining within actuaries’ acceptable range. More detail is available on Page 15.

In assessing the Net pension Liability that has been recognised in the financial statements one misstatement was identified between the actual rate of return on assets achieved and the value the Actuary estimated in their report. This misstatement has not been corrected, see unadjusted misstatement – Appendix 3.

Auditing Standards requires where we have identified a significant audit risk, for management to have a review control in place (MRC) to respond to the risk. The threshold set for an effective Management Review Control is a high one, with various criteria that must be met including creating an independent expectation around amounts estimated. While we acknowledge that putting such a control in place would be impractical for a Council of your size, under Audit Standards we communicate to you that we have not identified such a MRC that is designed and implemented in such a way to provide the level of precision, response, investigation, and follow up needed by the Auditing Standards. It is recommended.

2 Valuation of land and buildings, investment properties

Significant audit risk

Risk: The carrying amount of revalued Land & Buildings, and Investment Properties differs materially from the fair value

The value of the Council’s Other Land and Buildings at 31 March 2024 was £338.5m, and Investment Property was £19.2m.

The Code requires that Land and Buildings and Investment Properties are subject to revaluation and their year end carrying value should reflect the fair value at that date.

Any asset valuation carries with it risks of estimation uncertainty. The size of the land and buildings balance relative to our expected materiality means that the risk of a material difference between carrying value and fair value is increased.

Our response

We performed the following procedures designed to specifically address the significant risk associated with the valuation:

Control design:

• We evaluated the design and implementation of controls in place for management to review the valuation and the appropriateness of assumptions used.

Assessing the valuer’s credentials:

• We critically assessed the independence, objectivity and expertise of Orkney and Shetland Joint Valuation Board, the valuers used in developing the valuation of the Council’s properties at 31 March 2025; and
• We inspected the instructions issued to the valuers for the valuation of land and buildings to verify they are appropriate to produce a valuation consistent with the requirements of the Code.

Input assessment:

• We compared the accuracy of the data provided to the valuers for the development of the valuation to underlying information, such as floor plans, and to previous valuations, challenging management where variances were identified.

Assessing methodology and benchmarking assumptions:

• We challenged the appropriateness of the valuation of land and buildings; including any material movements from the previous valuation. We challenged key assumptions within the valuation, including the use of relevant indices and assumptions around physical and functional obsolescence;
• We performed inquiries of the valuers in order to verify the methodology that was used in preparing the valuation and whether it was consistent with the requirements of the Royal Institute of Chartered Surveyors (RICS) Red Book and the Code; and
• We agreed the calculations performed of the movements in value of land and buildings and verified that these had been accurately accounted for in line with the requirements of the Code.

Assessing transparency:

• Disclosures: We considered the adequacy of the disclosures concerning the key judgements and degree of estimation involved in arriving at the valuation.

Our findings

We have completed our work in relation to valuation of DRC, HRA and investment properties.

Auditing Standards requires where we have identified a significant audit risk, for management to have a review control in place (MRC) to respond to the risk. The threshold set for an effective Management Review Control is a high one, with various criteria that must be met including creating an independent expectation around amounts estimated. While we acknowledge that putting such a control in place would be impractical for a Council of your size, under Audit Standards we communicate to you that we have not identified such a MRC that is designed and implemented in such a way to provide the level of precision, response, investigation, and follow up needed by the Auditing Standards. It is recommended.

3 Fraud risk from expenditure recognition – cut-off of expenditure

Significant audit risk

Risk: Liabilities and related expenses for purchases of goods or services are not complete.

Under ISA 240 there is a presumed risk that income may be misstated due to improper recognition of income. This requirement is modified by Practice Note 10, issued by the FRC, which states that auditors should also consider the risk that material misstatements may occur by the manipulation of expenditure recognition.

In our audit plan reported to you in April 2025, we outlined that we intended to rebut the presumed risk of fraudulent revenue recognition, as we considered that there are limited incentives and opportunities to manipulate the way income is recognised in a material way. We continue to rebut this presumed risk. We also reported that we had not at the planning stage of our audit rebutted the risk around expenditure recognition, and noted that this was most likely to occur through the completeness of recognition of expenditure.

Following completion of all our risk assessment activities, we have concluded there is a significant risk in respect expenditure recognition in the incorrect accounting period (cut-off) risk over the completeness (understatement) of accrued expenditure and payables.

Our response

We performed the following procedures designed to specifically address the significant risk:

• We evaluated the design and implementation of the controls in place for manual expenditure accruals;
• We performed a search for unrecorded liabilities by selecting a sample of expenditure items paid from the Council’s bank accounts in the period following year-end, and confirming that those relating to 2024/25 expenditure was accrued appropriately at year-end.
• We tested purchase transactions close to the year end to confirm that they are recorded in the correct period.

Our findings

We have not identified any fraudulent expenditure recognition during our testing. We have not identified any material misstatements from our completed procedures.

Auditing Standards requires where we have identified a significant audit risk, for management to have a review control in place (MRC) to respond to the risk. We have not identified such a MRC that is designed and implemented in such a way to provide the level of precision, response, investigation, and follow up needed by the Auditing Standards. However, the Council has a number of year end processes including a journal approval process which authorises the year end accruals as they are entered into the General Ledger; and budgetary controls that assist in identifying unusual or unexpected variances from budget. Management considers these arrangements are sufficient to address the Council face.

4 Management override of controls

Significant audit risk

Risk: Liabilities

Professional standards require us to communicate the fraud risk from management override of controls as significant.

Management is in a unique position to perpetrate fraud because of their ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively.

We have not identified any specific additional risks of management override relating to this audit.

Our response

• Our audit methodology incorporates the risk of management override as a default significant risk. In line with our methodology, we evaluated the design and implementation and, where appropriate, tested the operating effectiveness of the controls in place for the approval of manual journals posted to the general ledger to ensure that they are appropriate;
• We analysed all journals through the year and focused our testing on those with a higher risk, such as journals with unusual expenditure code combinations;
• We assessed the appropriateness of changes compared to the prior year to the methods and underlying assumptions used to prepare accounting estimates;
• We reviewed the appropriateness of the accounting for significant transactions that are outside the Council’s normal course of business, or are otherwise unusual; and
• We assessed the controls in place for the identification of related party relationships and tested the completeness of the related parties identified. We verified that these have been appropriately disclosed within the financial statements.

Our findings

• We identified 24 journal entries and post closing journal meeting our high-risk criteria.
• We evaluated accounting estimates and did not identify any indicators of management bias. See page 15 to 16 for further discussion.
• Our examination did not identify any inappropriate entries.
• We did not identify any significant unusual transactions, based on work performed.
• We did not identify any issues from our related parties testing, based on work performed.

Key accounting estimates – Overview

Our view of management judgement

Our views on management judgements with respect to accounting estimates are based solely on the work performed in the context of our audit of the financial statements as a whole. We express no assurance on individual financial statement captions. Cautious means a smaller asset or bigger liability; optimistic is the reverse.

Cautious — Neutral — Optimistic

Needs improvement — Neutral — Best practice

We reviewed the approach to valuation of land and buildings. We concur with management’s assessment with one exception in which there is a difference in professional opinion related to a piece of land (appendix 3, p52).

Other estimates

We have also reviewed the following non-significant estimates as part of our audit work:

• Depreciation

Group involvement – significant component audits

Involvement in group components

The Council management have assessed on the basis of materiality and significant influence that the Group financial statements are made up of the following components:

We have assessed from a Group perspective the following:

• Orkney Islands Council (Parent) (significant);
• Orkney Integration Joint Board (not significant);
• Orkney Ferries Limited (non-significant – testing of defined benefit obligation balance);
• Pickaquoy Centre Trust (non-significant); and
• Hammers Hill Energy Limited (non-significant).

We performed testing of specific balances for Orkney Ferries Limited and we have performed risk assessment procedures over the remaining components in order to confirm that there were not material balances within the other entities that could cause a material error and did not identify any exceptions.

We did not identify any errors as a result of the procedures set out above based on work performed.

Other matters

Annual report

The Local Authority Accounts (Scotland) Regulations 2014 require the inclusion of a management commentary within the annual accounts, similar to the Companies Act requirements for listed entity financial statements. The requirements are outlined in the Local Government finance circular 5/2015.

We are required to read the management commentary and express an opinion as to whether it is consistent with the information provided in the annual accounts. We also review the contents of the management commentary against the guidance contained in the local government finance circular 5/2015.

We have considered the accounts and annual report and provided feedback to management who have addressed our observations.

Independence and Objectivity

ISA 260 also requires us to make an annual declaration that we are in a position of sufficient independence and objectivity to act as your auditors, which we completed at planning and no further work or matters have arisen since then.

Audit Fees

The base fee for the audit was £242,810 (2023/24: £238,260).

We have not completed any non-audit work at the Council during the year.

Wider Scope and Best Value

Financial Management

Financial management is concerned with financial capacity, sound budgetary processes and whether the control environment and internal controls are operating effectively.

2024/25 budget and performance

In March, 2024 the Council agreed its 2024/25 budget based on the recommendation from the Policy and Resources Committee. General fund revenue budget was set at £112.3 million.

When setting the budget and Council Tax levels for 2024/25, the Council delegated powers to the Head of Finance, in consultation with the Corporate Director for Enterprise and Sustainable Regeneration and the Chief Executive, to revise the General Fund revenue budget for financial year 2024/25 in respect of any change to the estimated funding levels.

Following above a detailed budget was presented to the Policy and Resources Committee dated 17 June 2024 and was recommended for approval to the Council.

The final revised amount of the budget after taking into account the adjustments throughout the year, as reported in the annual financial statements, amounted to £115.1 million. Actual expenditure was £114.3 million. Major variances have been analysed as follows:

Orkney Health & Care – The continuation of recruitment pressures has resulted in the ongoing requirement to use agency staff to cover essential posts, which costs a premium.

Roads and Transport – Winter maintenance costs, surface treatment and patching for 2024/25 were high. Annual costs of maintaining airfield runways and general infrastructure were also high.

Other Services – Underspend on loan charges due to slippage on the planned delivery of the capital programme and the current programme of approved projects nearing completion. Increased interest on revenue balances.

The annual accounts provide a reconciliation between the planned and actual surplus/deficit, including the accounting adjustments to arrive at the amount of surplus as per the financial statements.

The Council continues to incur significant capital investment with £17.2 million being spent in 2024-25. Funding of capital expenditure mainly included £0.5 million from capital receipts, £9.7 million of grants with the balance of £6.9 million being met through internal funding and borrowing.

The Council reported an underspend of £0.3 million due to the expenditure not meeting the profile assumed in the capital programme. Capital outrun reports were presented periodically to the Policy and Resources Committee.

2025/26 budget

On 4 March 2025, when setting the budget and Council Tax levels for 2025/26, the Council delegated powers to the Head of Finance, in consultation with the Corporate Director for Enterprise and Sustainable Regeneration and the Chief Executive, to prepare and distribute a detailed budget incorporating all the budget adjustments agreed by the Council, and any settlement updates and/or clarifications unknown on 25 February 2025. General fund revenue budget was set at £119.2 million.

The approved budget exceeds the previous budget by £6.9 million and includes use of Strategic Reserve Fund amounting up to £20 million.

Budget Monitoring

Periodic revenue expenditure monitoring reports are presented to Individual Service committees. Additionally annual expenditure monitoring reports are presented to the Policy and Resources Committee.

Internal controls

As part of our audit, we identify and assess the key internal controls relevant to our audit. Our objective is to plan and seek assurance, where relevant, that the body has controls around recording and processing transactions to provide a sound basis for the preparation of the financial statements. Overall financial systems of internal control operated effectively, with the exception of the control weaknesses identified in the relevant section of this report.

Internal Audit

Internal Audit charter for 2024/25 was presented to the Monitoring and Audit Committee dated 6 June 2024 and was approved.

The annual report and opinion for 2024/25 was presented to the committee dated 28th August 2025 and noted that the Council has a framework of controls in place that provides adequate assurance regarding the organisation’s governance framework, internal controls, and the management of key risks.

75% of the planned audits were reported as complete. Of the completed audits limited opinion was expressed in relation to two audits.

The report notes that throughout the previous financial year a common theme had emerged, which is non-compliance with the Council’s Financial Regulations and Contract Standing Orders. It further notes that action was taken by the Head of Finance and the Head of Corporate Governance to raise awareness and improve compliance with these policies, and this has reduced both the instances of non-compliance identified and also the severity of the types of breaches. During 2024/25 only 4 instances were identified, 3 of which were minor in nature.

The report further notes that at the financial year end there were 25 (PY:32) recommendations which were past the agreed target date for completion. Of these 2 were high priority, 12 were medium and 11 were low priority.

Fraud prevention mechanisms

The Council is responsible for establishing arrangements for the prevention and detection of fraud, error and irregularities, bribery and corruption. Furthermore, it is responsible for ensuring that its affairs are managed in accordance with proper standards of conduct by putting effective arrangements in place.

There are established procedures for preventing and detecting any breaches of these standards including any instances of corruption enacted through the anti fraud and corruption policy and whistleblowing policy.

The National Fraud Initiative (NFI) is a counter-fraud exercise across the UK public sector which aims to prevent and detect fraud. We note that the Council recognised the need for and participates in the initiative.

Financial regulations

The standing financial regulations are comprehensive and available on the website for public access. The regulations were reviewed by the Policy and Resource Committee dated 18th June 2024.

Going Concern

The Council’s Group Accounts have been prepared on a “going concern” basis as it is expected that future local government finance settlements, aligned with the budget process, which drives through efficiency savings, will provide sufficient resources to finance future liabilities.

Conclusion

• Council has established budget setting and monitoring systems is in place.
• An established Internal Audit system is in place.

Financial Sustainability

Financial sustainability looks forward to the medium and longer term to consider whether the body is planning effectively to continue to deliver its services or the way in which they should be delivered.

Medium term financial strategy (MTFS)

The Council’s latest financial strategy update covers the period 2025/26 to 2029/30. The plan with the latest update was presented to the Policy and Resources Committee, and recommended to the Council for approval, dated 17 June 2025.

The strategy identifies the following key financial risk areas faced by the Council over the medium term:

• Level and reduction in real terms of Scottish Government funding.
• Pay awards.
• General inflation.
• Economies of scale.
• Level of competition / choice.
• Demographics, in particular ageing population.
• Investment return volatility.
• Housing shortages.
• Recruitment and retention.
• Increasing levels of demand.
• Increased cost of borrowing.

Strategy notes that the potential funding gap faced by the Council may amount to £27.1 million over the period covered by the MTFS and recognises the need for delivering savings to achieve financial balance.

The projections produced contain several assumptions which are considered most likely by the Council:

• Staff costs – 2% to 3% annual increase over the forecast period.
• Budget uplifts – 2% increase on annual basis.
• CPI on charges – 2% annual increase.
• Council tax – 2% annual increase.

The Medium-Term Financial Strategy includes an analysis of best and worst case scenarios as part of the financial planning. The risks associated with the assumptions in the MTFS include forecast error, economic performance (including inflation assumptions), changes to Scottish Government spending, political pressure, and demand-led need. The best and worst case scenario result in a funding gap to rise to £24.4 million and £27 million respectively by 2029/2030.

The MTFS currently proposes to bridge the funding gap through contributions from Strategic Reserves Fund, County Fund Contribution and new charges, efficiencies and transformation. Planned new charges, efficiencies and transformation amount to £40.8 million over the period of the MTFS.

The amounts currently identified on account of requisite amounts above, amount to £793k and £2.8 million for 2026/27 and 2027/8. In order to balance the projected 2026/27 budget, based on the MTFS assumptions, the Council will have to identify additional funding, charges or efficiencies of £3.1 million. For 2027/28 £6.3 would have to be found.

We noted as part of the previous year audit that although the strategy has identified the options available to bridge the gap, detailed plans at operational/service level are required to be developed and implemented to ensure achievement. The 2024/25 budget as well the medium term strategy identify the use of reserves to bridge the funding gap however pressures on investment returns and strategic reserve fund and falling general fund balances make this approach untenable on an ongoing basis.

We recommended that the Council needs to continue to develop specific plans to bridge the gap in a sustainable manner.

Prior year recommendation

As part of prior year audit we noted that the Island Communities Impact Assessment was not carried out as part of MTFS development as it was considered unlikely to have an impact by the Council. We recommended that the Council should review the applicability of this assessment as part of the development of all plans, ensuring it is completed in respect of service redesign arising from the MTFS. The latest approved MTFS notes that the strategy being reviewed has been assessed as being unlikely to have an effect on an island community which is significantly different from its effect on other communities (including other island communities) in Orkney, accordingly a full Island Communities Impact Assessment has not been undertaken.

The Council plan identifies securing a new fleet of green ferries as one of the biggest challenges, under the developing our infrastructure theme, in light of the ageing fleet. Further associated performance measures and action points have been identified as part of the Council plan and Council delivery plan respectively. The Scottish Government has agreed to the further funding of a business case to investigate replacing Orkney’s internal ferry fleet.

This now requires the Council to build an agreed business case for ferry replacement, providing the resources required for work to scope out options and to carry out physical investigative works around Orkney’s pier and harbours infrastructure including assessment of the impact on the future budgets and the medium term financial strategy. The latest update, provided to the Policy and Resource Committee, in June 2025 noted ongoing dialogue with Scottish Government and funding supplied to conduct design work on both potential future ferries and port infrastructure.

Capital Projections

As part of our previous year audit we noted that the Council has a capital programme in place. We further noted that the 2021/22 Annual Audit report recommended minimisation of recurring capital slippage which continues to occur in 2022/23. The Council delivery plan, which is a key document in relation to implementation of the Council plan, identifies the action plan in relation to capital program under the theme of “Developing our Infrastructure”. The action plan identifies the objective to finalize and approve the new capital program in 2024/25 along with the monitoring of the current capital programme.

Slippage continued to occur in 2023/24. A report, titled “Review of Capital Programme: Capital Slippage”, was presented to the Policy and Resource Committee dated 18th June 2024. The report noted that The Council has seen slippage in the delivery of capital projects for a number of years. The report recommended the amendment to the capital programme through consideration of the redeployment of a number of project budgets.

An update on capital slippage and a revised Capital Project Appraisal process has been developed through working with the Finance team in partnership with whom a review of the programme has been done, with projects which cannot progress at present being recommended for removal from the programme by Policy and Resources Committee in June 2024, which reduces artificial items of slippage.

The updated Capital Strategy and updated Capital Project Appraisal process were presented to Policy and Resources Committee in November 2024 and subsequently approved by the Council.

Reserves Strategy

The General Fund Reserves Strategy was reviewed by the Policy and Resources Committee in February 2025, in the context of setting revenue budget for 2025/26.

Strategic Reserve Fund (SRF)

The purpose of the Strategic Reserve Fund is to provide for the benefit of Orkney and its inhabitants including the development of one-off strategic capital projects. The Strategic Reserve Fund is also supporting the level of General Fund Services as part of an agreed Medium Term Financial Strategy. For the financial year 2024-25 £20m from the Strategic Reserve Fund was used as a funding source to supplement the General Fund Services revenue budget. The approved contributions from the Strategic Reserve Fund for 2024/25 together with indicative budgets for 2025/26 and 2026/27, were set at £20m, £18m and £15m respectively. The draw on reserves was set at £18.5m as part of detailed revenue budgets presented to the Policy and Resources Committee in June 2025.

The currently approved medium term financial strategy assumes SRF contribution amounting to £52.4 million and £4million on account of SRF contribution and Advance SRF re Wind Farm over the next five years.

One of the key principles of the medium term financial strategy is to ensure sustainable use of strategic reserves keeping in view the fund’s commitment in relation to long term decline and potential decommissioning cost to the Council of the Flotta Oil terminal.

While there is a level that can be utilised, overuse of strategic reserve fund, as previously noted, is not sustainable as part of the longer-term financial plans and strategy. We recommend that the Council should carry out detailed analysis to develop a strategy in relation to sustainable use of the strategic reserve fund taking into account the long term commitments/plans of the Council which are expected to be settled/implemented through the use of the fund balance.

Prior year recommendation

Conclusion

• MTFS is in place and takes into account scenario analysis and planning.
• Options to bridge the identified funding gaps have been identified as part of the MTFS.
• The 2025/26 budget as well the medium term financial strategy identify the use of reserves to bridge the funding gap however pressures on investment returns and strategic reserve fund and falling general fund balances make this approach untenable in the medium term.
• The Council has a capital programme in place.
• The Council has a reserves strategy in place.
• The Council should carry out detailed analysis to develop a strategy in relation to sustainable use of the strategic reserve fund taking into account the long term commitments/plans of the Council which are expected to be settled/implemented through the use of the fund balance.

Vision, leadership and governance

Vision, leadership and governance is concerned with the effectiveness of scrutiny and governance arrangements, leadership and decision making, and transparent reporting of financial and performance information.

The governance framework is the system by which the Council leads, directs and controls its functions and relates to the community and other stakeholders. It includes the systems, processes, cultures and values through which the Council strives to adhere to the principles of good governance of openness, inclusivity, integrity and accountability. The Council’s corporate governance is underpinned by the CIPFA/Solace Framework ‘Delivering Good Governance in Local Government’. A revised edition of the Framework was published in early 2016 and the Local Code of Corporate Governance was updated to reflect the 2016 edition of the Framework. The Council adopted the revised Local Code of Corporate Governance in 2017. Review was carried out and revisions to the code were approved in October 2022. The updated code is published on the Council's website for public access.

The Council has adopted a code of conduct for its employees and councillors which has been published on the website for awareness and public access. Arrangements are in place to ensure Members and officers are supported by appropriate learning and development.

Strategy

The overarching strategic vision of the Council is detailed in the Council’s Plan which sets out the key outcomes the Council is committed to delivering with its partners. The plan extends for 5 years from 2023 to 2028. The plan is available for public’s access on the Council’s website. The Council plan is accompanied by a delivery plan. This Delivery Plan complements and supports Orkney Islands Council’s strategic plan for the current Council term. The Delivery Plan describes some of the projects, services and policies which will progress priorities of the Council plan and achieve tangible outcomes for Orkney. The Council's Performance Management Framework sets out the process for monitoring performance against the strategic objectives. Priorities under the strategic plan are aimed to be delivered through service delivery plans.

Involvement of Stakeholders

Consultation relating to this plan was carried out in two stages. As part of the first stage the Council conducted a consultation exercise under the banner ‘Orkney Matters’. This exercise included a questionnaire, a series of online meetings, and dedicated sessions for schools and community groups, which used art to engage with people less likely to respond through regular channels. The second stage was a public consultation on the draft plan itself before the plan was finalised.

The Council acknowledges the vulnerabilities of the remote communities like the ferry-linked isles as part of the development of the Council plan and have community specific performance measures and actions plans as part of the Council plan and Council delivery plan respectively.

Equalities Impact Assessment and Island Communities Impact Assessment were carried out as part of the development of the plan and presented for consideration along with the presentation of the Council plan for approval to the Policy and Resources Committee.

Setting and reporting of operational performance

In order to monitor and review progress the Council plan lays out performance measures and specified targets for each theme, to be achieved by the conclusion of the Council plan, which includes the three priority themes and the overall theme of transforming the Council. Some performance measures and targets are taken from the Orkney Partnership’s Community Plan and some are taken from the Local Government Benchmarking Framework (LGBF).

Governance statement

As part of our audit process we review the Annual Governance Statement in the annual report and accounts. Governance statement is reviewed and approved by the relevant committees of Council ahead of being published as part of the annual accounts. The arrangements are appropriate and operated effectively during 2024/25.

Standing Orders, Schemes of Delegation and Financial Regulations

The Council operates within an established procedural framework. The roles and responsibilities of Elected Members and officers are defined within the Council’s Standing Orders and Scheme of Administration, Contract Standing Orders, Scheme of Delegation and Financial Regulations. These are subject to regular review.

Risk Management

In order to manage and monitor its risks, the Council has an approved risk management strategy. Revised risk management policy and strategy 2024 - 26 was approved in October 2024.

The policy requires the review and maintenance of risk registers. Corporate risk registers were presented to the Policy and Resources Committee periodically.

Scrutiny, challenge and transparency

Status of progress of audit recommendations and action points are regularly reported and considered by the Audit Committee. Committee minutes and related documents are available on the website for public scrutiny. The Council maintains a website where users can find further wide range of information about the Council including documents relating to strategies, policies and performance.

Alternative models of Governance

A reported titled “Alternative models of Governance” was presented to the Policy and Resources Committee dated 19th September 2023. Purpose of the report was to consider the scope of work, together with the resources required, to explore options for alternative models of governance that would provide greater fiscal security and economic opportunity for the Islands of Orkney. This was in pursuance of a notice of motion on alternative governance arrangement presented to the Council on 4 July 2023.

A progress update was provided to the Policy and Resources Committee on 17th June 2025. The Committee resolved to recommend that the Council should focus on engagement with the Scottish Government, COSLA and NHS Orkney in advancing the Single Authority Model agenda as set out in the current Programme for Government and supported by specific grant funding as the most likely option to ultimately progress to Stage 2 of the project.

Conclusion

• Council has effective strategic planning in place.
• Directorate Delivery plans have been developed.
• Governance arrangements are appropriate and operated effectively.
• Arrangements are in place in relation to security, challenge and transparency.

Use of resources to improve outcomes

Audited bodies need to make best use of their resources to meet stated outcomes and improvement objectives, through effective planning and working with strategic partners and communities. This includes demonstrating economy, efficiency, and effectiveness through the use of financial and other resources and reporting performance against outcomes.

The Council’s Strategic Planning and Performance Framework describes the elements that make up the Council’s strategic planning and performance arrangements, and its role in the strategic planning and performance arrangements of the Orkney Partnership. The framework goes on to describe the Council’s arrangements for service and corporate self-assessment, service planning, workforce planning, and the management of risk, performance and business continuity. This was set in 2019 and needs to be updated to align with the new Council plan.

Recommendation one

Public Performance Reporting is a requirement carried out largely through the Council’s Public Performance Reporting (PPR) webpages of the Council’s website. The PPR webpages contain a wide variety of performance reports, for example, the Council’s Annual Performance Report and Council Plan Monitoring Reports.

The Council’s Annual Performance Reports are structured around Council priorities, and use various measures to show how well the Council performed during particular years. The annual performance reports for 2023/24 and earlier years are available for public access on the Council’s website. The performance report reports achievement against the action points identified in the Council delivery plan aimed towards satisfaction of the key themes identified in the Council plan 2023-28 and best value.

This is based on performance reporting, against the delivery plan, reported to the Policy and Resources Committee on a periodic basis based on the following status categories:

• BLUE = Completed.
• RED = Overdue/Significant underperformance with a medium to high risk of failure to meet the target.
• AMBER = Minor underperformance, with a low risk of failure to meet the target.
• GREEN = On target.

The Council Plan 2023 to 2028 also lists performance measures in order to monitor and review progress on the delivery of the strategic priorities. This report provides the most recent data and status for each performance measure listed under each strategic priority as either:

• RED = The performance measure is experiencing significant underperformance, with a medium to high risk of failure to meet its target.
• AMBER = The performance measure is experiencing minor underperformance, with a low risk of failure to meet its target.
• GREEN = The performance measure is likely to meet or exceed its target.

The Local Government Benchmarking Framework (LGBF) brings together a wide range of information about how all Scottish Councils perform in delivering services to local communities. The LGBF assists Councils in benchmarking their performance in key areas and creates opportunities to identify and share good practice. The link to LGBF performance is provided on the Council’s website as well as the annual accounts, which allows visualization of the Council’s performance by service areas and indicators.

Taking into account all indicators, as per the latest published data the Council’s performance has improved or stayed the same as compared to the prior year and base year in relation to 54% and 55% of the indicators. The percentage of indicators in top 2 quartile reduced from 54% to 53%.

The lowest percentages in relation to indicators in the top 2 performance quartiles related to cost indicators, corporate services and tackling climate change categories i.e. 30%, 21% and 0% respectively. Performance against cost indicators has improved as compared to base year.

A detailed report was presented to the Policy and Resource Committee, dated 17th June 2025 to provide an overview of performance in relation to LGBF and to scrutinise the performance against measures specific to Orkney Council.

Conclusion

Performance management arrangements provide a sound base for improvement.

The Publication of Information (Standards of Performance) Direction 2021 Statutory Performance Indicators

The Accounts Commission issued a new Statutory Performance Information (SPIs) Direction in December 2021 which applies for the three years from 2022/23.

Direction requires a Council to report its:

• performance in improving local public services (including those provided with its partners and communities), and progress against agreed desired outcomes (SPI 1). The Commission expects this reporting to allow comparison both over time and with other similar bodies (drawing on Local Government Benchmarking Framework and/or other benchmarking activities).
• own assessment and audit, scrutiny, and inspection body assessments of how it is performing against its duty of Best Value, and how it has responded to these assessments (SPI 2).

Details of how the Council complies with requirements of SP1, along with the related recommendations, are included in the “Use of resources to improve outcomes” slide.

The Council has a system in place to report regular updates in relation to the achievement of strategic objectives to the Service Committees and the Policy and Resources Committee in the form of monitoring of the Council delivery plan. The latest reporting is accessible through accessing the minutes of the relevant committees.

Progress against action pointes emanating from external and internal assessments is reported to and monitored by the Policy and Resources Committee and are accessible by public through the minutes of the meetings of the relevant committee. The Council Plan 2023-28 was published for consultation, which also included the performance measures mapped against the desired outcomes and key themes. This enabled the respondents to consider and comment on the meaningfulness of the performance indicators. The plan was updated in light of the responses and presented to the Policy and Resources Committee dated 21 February 2023. The Council has made arrangements related to self-evaluation of services.

Conclusion

Council has made arrangements to comply with the SPI Directions.

Best Value

Local government bodies have a duty under the Local Government in Scotland Act 2003 to make arrangements which secure Best Value. Best Value is continuous improvement in the performance of the body’s functions.

Under the new Code of Audit Practice, the audit of Best Value in Councils is fully integrated within the annual audit work performed by appointed auditors and their teams. Auditors are required to evaluate and report on the performance of Councils in meeting their Best Value duties.

There are the following four aspects to auditors’ work:

• Follow-up and risk-based work.
• Service improvement and reporting.
• Thematic reviews.
• Contributing to Controller of Audit reports.

Thematic reviews

Auditors are required to report on Best Value or related themes prescribed by the Accounts Commission. The thematic work for 2024/25 is on the subject of service transformation. In carrying out the overview, auditors are required to answer the following questions:

• To what extent does the council have clear plans for transformation that link to its priorities and support long-term financial sustainability?
• To what extent do the council’s programme management arrangements facilitate effective oversight of its transformation plans?
• To what extent are communities and partners involved in the development and delivery of the council’s plans for transformation?
• To what extent has the council considered the impact of its transformation activity, including on vulnerable or protected groups?

As required by guidance we issue a separate management report.

Some of the key messages are:

• The council’s plans for transformation are embedded within its key plans and strategies and align with its corporate priorities. It does not have an overarching transformation programme, but ‘transforming our council’ is a key theme underlying its plans.
• The council’s transformation projects vary in scale, and it is clear how it will address its funding gaps/ contribute to the financial sustainability of the Council. However, the Council needs to consider projects to generate further cost savings/income generation required to address the financial challenge identified as part of the financial strategy.
• The Council faces challenges including sufficient staffing capacity to deliver its transformation ambitions.

There is one improvement action which relates to the need for the Council to consider additional schemes to generate cost savings or generate income in order to meet the financial challenge identified as part of the medium-term financial strategy. This aligns with the prior year wider scope recommendation (page 44) in respect of which management has provided an update.

Appendices

Appendix one — Mandatory communications

Appendix two — Recommendations followed up and raised

We have followed up the recommendations raised in the prior years. Below is a table of the actions and implementation. We have disclosed below the prior year recommendations with the current management response.

Priority rating for recommendations

• Priority one: issues that are fundamental and material to your system of internal control. We believe that these issues might mean that you do not meet a system objective or reduce (mitigate) a risk.
• Priority two: issues that have an important effect on internal controls but do not need immediate action. You may still meet a system objective in full or in part or reduce (mitigate) a risk adequately but the weakness remains in the system.
• Priority three: issues that would, if corrected, improve the internal control in general but are not vital to the overall system. These are generally issues of best practice that we feel would benefit you if you introduced them.

Recommendations — Current year (Wider Scope)

Recommendations 2023-24 — Financial Statements

Recommendations 2023-24 — Wider Scope

Recommendations 2022-23 — Financial Statements follow up

Recommendations 22-23 — Wider scope

Recommendations raised — Best Value Thematic report – 22-23

Appendix three — Audit Differences

Adjusted audit differences (£’000s)

Under UK auditing standards (ISA (UK) 260) we are required to provide the Audit and Risk Committee with a summary of adjusted audit differences (including disclosures) in excess of £265,000 identified during the course of our audit. The adjustments below have been included in the financial statements.

Adjusted audit differences (£’000s) – Financial Statements (Council and Group)

In addition to above following change has been agreed for disclosures:

• Update to related parties note in relation to transactions with Orkney Ferries Limited.
• Presentational changes in respect of pension disclosures, include those related to pension asset ceiling.
• Casting and other internal consistency points.
• Disclosure updates regarding the term of provisions and related party balances with explanatory notes added, regarding the prior year.

Unadjusted audit differences (£’000s)

Under UK auditing standards (ISA (UK) 260) we are required to provide the Audit Committee with a summary of unadjusted audit differences (including disclosure misstatements) identified during the course of our audit, other than those which are ‘clearly trivial’, which are not reflected in the financial statements.

The first difference above, relates to the difference between the estimated and actual rate of return arose between the preparation of the draft and audited accounts and could not have been known by management when preparing the draft. This is a common difference arising in the sector which needs annual consideration for potential adjustment alongside other unadjusted differences.

The second difference also arose in the prior period, when it was adjusted, and relates to a difference in professional opinion regarding the valuation of certain land held by the Council.

Taken together, these exceed our performance materiality but are below our overall materiality.

Appendix four — Confirmation of Independence

To the Audit Committee members

Assessment of our objectivity and independence as auditor of the Orkney Islands Council.

Professional ethical standards require us to provide to you with a written disclosure of relationships (including the provision of non-audit services) that bear on KPMG LLP’s objectivity and independence, the threats to KPMG LLP’s independence that these create, any safeguards that have been put in place and why they address such threats, together with any other information necessary to enable KPMG LLP’s objectivity and independence to be assessed.

This letter is intended to comply with this requirement and facilitate a subsequent discussion with you on audit independence and addresses:

• General procedures to safeguard independence and objectivity;
• Independence and objectivity considerations relating to the provision of non-audit services; and
• Independence and objectivity considerations relating to other matters.

General procedures to safeguard independence and objectivity

KPMG LLP is committed to being and being seen to be independent. As part of our ethics and independence policies, all KPMG LLP directors and staff annually confirm their compliance with our ethics and independence policies and procedures including in particular that they have no prohibited shareholdings. Our ethics and independence policies and procedures are fully consistent with the requirements of the FRC Ethical Standard.

As a result we have underlying safeguards in place to maintain independence through:

• Instilling professional values
• Communications
• Internal accountability
• Risk management
• Independent reviews.

We are satisfied that our general procedures support our independence and objectivity.

Independence and objectivity considerations relating to the provision of non-audit services

Summary of non-audit services

We have not provided any non-audit services in year.

We confirm that, in our professional judgement, KPMG LLP is independent within the meaning of regulatory and professional requirements and that the objectivity of the Partner and audit staff is not impaired.

Confirmation of Independence — continued

We have considered the fees charged to the Council for professional services provided during the reporting period. Total fees charged can be analysed as follows:

Source: Audit Scotland

Application of the FRC Ethical Standard 2019

We communicated to you previously the effect of the application of the FRC Ethical Standard 2019. That standard became effective for the first period commencing on or after 15 March 2020, except for the restrictions on non-audit and additional services that became effective immediately at that date, subject to grandfathering provisions.

We confirm that as at 15 March 2020 we were not providing any non-audit or additional services that required to be grandfathered.

Confirmation of audit independence

We confirm that as of the date of this letter, in our professional judgement, KPMG LLP is independent within the meaning of regulatory and professional requirements and the objectivity of the partner and audit staff is not impaired.

This report is intended solely for the information of the Audit Committee and should not be used for any other purposes.

We would be very happy to discuss the matters identified above (or any other matters relating to our objectivity and independence) should you wish to do so.

Yours faithfully

KPMG LLP

Appendix five — KPMG’s Audit quality framework

Audit quality is at the core of everything we do at KPMG and we believe that it is not just about reaching the right opinion, but how we reach that opinion.

• To ensure that every partner and employee concentrates on the fundamental skills and behaviours required to deliver an appropriate and independent opinion, we have developed our global Audit Quality Framework.
• Responsibility for quality starts at the top through our governance structures as the UK Board is supported by the Audit Oversight Committee, and accountability is reinforced through the complete chain of command in all our teams.

Appendix five — continued

IMAGE: Audit quality framework infographic. The central “Audit quality framework” is surrounded by six linked areas: “Commitment to continuous improvement”; “Association with the right entities”; “Clear standards & robust audit tools”; “Recruitment, development & assignment of appropriately qualified personnel”; “Commitment to technical excellence & quality service delivery”; and “Performance of effective & efficient audits”. The infographic includes the following text:

• Commitment to continuous improvement
  • Comprehensive effective monitoring processes
  • Significant investment in technology to achieve consistency and enhance audits
  • Obtain feedback from key stakeholders
  • Evaluate and appropriately respond to feedback and findings
• Association with the right entities
  • Select clients within risk tolerance
  • Manage audit responses to risk
  • Robust client and engagement acceptance and continuance processes
  • Client portfolio management
• Clear standards & robust audit tools
  • KPMG Audit and Risk Management Manuals
  • Audit technology tools, templates and guidance
  • KPMG Clara incorporating monitoring capabilities at engagement level
  • Independence policies
• Recruitment, development & assignment of appropriately qualified personnel
  • Recruitment, promotion, retention
  • Development of core competencies, skills and personal qualities
  • Recognition and reward for quality work
  • Capacity and resource management
  • Assignment of team members, employed KPMG specialists and specific team members
• Commitment to technical excellence & quality service delivery
  • Technical training and support
  • Accreditation and licensing
  • Access to specialist networks
  • Consultation processes
  • Business understanding and industry knowledge
  • Capacity to deliver valued insights
• Performance of effective & efficient audits
  • Professional judgement and scepticism
  • Direction, supervision and review
  • Ongoing mentoring and on-the-job coaching, including the second line of defence model
  • Critical assessment of audit evidence
  • Appropriately supported and documented conclusions
  • Insightful, open and honest two-way communications

IMAGE: Closing page with the KPMG logo, social media icons, the text “kpmg.com/socialmedia”, trademark wording, and copyright information on a purple-to-blue gradient background.