South Staffs Council Audit Letter 03-04
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South Staffs Council Audit Letter 03-04

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Government and Public Sector April 2005South Staffordshire Council 2003/04 Audit and Inspection Letter The Members South Staffordshire Council Council Offices Codsall re WV8 1PX 28 April 2005 Ladies and Gentlemen Audit and Inspection Letter 2003/04 For the first time, this year we are pleased to present a joint Audit and Inspection Letter for 2003/04. This letter summarises: • the issues of significance arising from the work of your appointed auditor, carried out under the Audit Commission’s Code of Audit Practice; and • the results of the inspection work undertaken during 2003/04 by the Audit Commission in accordance with its responsibilities as detailed in section 10 of the Local Government Act 1999. This Audit and Inspection Letter will be presented to the Council’s Scrutiny (Audit) Sub-Committee at its meeting on 10 May 2005. The Council has adopted a very positive and constructive approach to our audit and inspection activities and has set itself challenging and demanding targets. We would like to extend our gratitude to all those members and officers with whom we have had contact for their help and assistance throughout the course of our work. Yours faithfully PricewaterhouseCoopers LLP Delyth Morris, Relationship Manager PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP ...

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      Government and Public Sector
South Staffordshire Council 2003/04 Audit and Inspection Letter     
pril 2005
   
   The Members South Staffordshire Council Council Offices Codsall South Staffordshire WV8 1PX  
28 April 2005
Ladies and Gentlemen
Audit and Inspection Letter 2003/04
For the first time, this year we are pleased to present a joint Audit and Inspection Letter for 2003/04. This letter summarises:   the issues of significance arising from the work of your appointed auditor, carried out under the Audit Commission’s Code of Audit Practice; and   the results of the inspection work undertaken during 2003/04 by the Audit Commission in accordance with its responsibilities as detailed in section 10 of the Local Government Act 1999.  This Audit and Inspection Letter will be presented to the Council’s Scrutiny (Audit) Sub-Committee at its meeting on 10 May 2005.  The Council has adopted a very positive and constructive approach to our audit and inspection activities and has set itself challenging and demanding targets. We would like to extend our gratitude to all those members and officers with whom we have had contact for their help and assistance throughout the course of our work.  
Yours faithfully
 
PricewaterhouseCoopers LLP Delyth Morris, Relationship Manager
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services Council for designated investment business.
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 Contents
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 Council Performance.............................................................................................................................................................................................................................................7  Accounts and Governance....................................................................................................................................................................................................................................9  Audit and Inspection Plans 2004/05 and Fees Update.......................................................................................................................................................................................17    Code of Audit Practice and Statement of Responsibilities of Auditors and of Audited Bodies We perform our audit in accordance with the Audit Commission’s Code of Audit Practice (the Code), which was last issued in March 2002. This is supported by the Statement of Responsibilities of Auditors and Audited Bodies, which was last issued in April 2000. Both documents are available from the Chief Executive of each audited body. The purpose of the statement is to assist auditors and audited bodies by explaining where the responsibilities of auditors begin and end, and what is to be expected of the audited body in certain areas. Our reports and annual audit and inspection letters are prepared in the context of this statement and in accordance with the Code. Reports and letters prepared by appointed auditors and relationship managers and addressed to members or officers are prepared for the sole use of the audited and inspected body, and no responsibility is taken by the Audit Commission or its appointed auditors to any member or officer in their individual capacity, or to any third party.   
 Executive Summary
The purpose of this report  This joint audit and inspection letter summarises:   the issues of significance arising from the work of your appointed auditor, carried out under the Audit Commission’s Code of Audit Practice; and   the results of the inspection work undertaken during 2003/04 by the Audit Commission in accordance with its responsibilities as detailed in section 10 of the Local Government Act 1999.  The joint reporting of audit and inspection work in this format recognises the steps that the Audit Commission has taken to integrate more closely audit and inspection regimes, whilst recognising and maintaining their separate statutory responsibilities. The Audit Commission has appointed ‘relationship managers’ for all local authorities to co-ordinate planning and delivery of inspection work alongside the statutory audit work.  The inspection work undertaken at South Staffordshire Council (the Council”) si carried out by the Audit Commission. As your appointed auditors and Relationship Manager, we have liaised closely during the course of the year to ensure that our work is integrated. The new approach is intended to provide a more proportionate and integrated approach to performance audit and inspection work.     
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Our 2003/04 Audit and Inspection plans set out the risks that we identified as part of our planning process, together with the targeted work that we planned to perform in order to address these risks. The work undertaken by the Audit Commission this year related predominantly to the Council’s Comprehensive Performance Assessment (CPA). We have set out below what we consider to be the key issues arising from our audit and inspection work. We are pleased to present what we believe is a positive Audit and Inspection Letter to the members of South Staffordshire Council.  Council Performance  The Council was assessed as fair under the comprehensive performance assessment (CPA) framework. It scored well in seven of the ten themes assessed. The Council has clear ambitions and has established priorities for protecting the environment, being a safe place to live and keeping council tax low. There is a strong focus on service delivery of established priorities but corporate working on cross-cutting areas is not as strong. A performance management framework is in place and developing. The Council is in a strong financial position but there are constraints on capacity, for example gaps in skills which are being addressed. Investment is geared towards service improvement, for example recycling and waste minimisation. In response to the CPA report the Council has agreed a comprehensive improvement plan.     
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ƒ  Under the Local Government Act 1999 we are required to carry out an audit of the Council’s Best Value Performance Plan (BVPP). In our opinion, the Council had prepared and published its 2004/05 BVPP in all significant respects in accordance with section 6 of the Local Government Act 1999 and statutory guidance issued by the Government and hence we were able to give an unqualified opinion on the BVPP. Furthermore, on the basis of our audit work, there were no statutory recommendations to be brought to your attention. ƒ  As part of our audit of the Council’s 2004/05 BVPP, we also followed up the Council’s progress in addressing the recommendations made in our 2002/03 Audit Letter in respect of the Council’s Best Value arrangements. We concluded that the Council was making progress in implementing the agreed actions in response to the recommendations made.  
Accounts and Governance   We will be issuing an unqualified audit opinion on the Council’s 2003/04 accounts.  The Pension Fund’s actuary assessed the Council’s share of the deficit in the Fund as £5.69 million at 31 March 2004, which represented a decrease in the deficit of £2.88 million from the previous year. The most recent valuation, as at 31 March 2004, has confirmed that the fund remains in deficit. The Council has recognised the impact of the pension deficit in its Medium Term Financial Strategy and members will be aware, therefore, that contribution rates will increase from the 2004/05 level of 5.6% to 17.7% over a six year period.   
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ƒ  The Council set a net budget requirement for 2003/04, after transfers from reserves, of £8.515 million to be funded from government grants and local taxpayers. The Council’s actual net operating expenditure, before any transfers from reserves, at the year-end totalled £9,467 million compared to the original budget of £10.537 million. The underspend of £1.07 million, representing approximately 10% of the original budget, was due principally to a provision for redundancy payments not required within the 2003/04 financial year; reductions in the cost of Benefit Administration; and higher than expected income from Building and Development Control activities. As a result the Council was able to transfer £244,000 to the general fund reserve (reflecting the reported surplus for 2003/04) rather than an anticipated use of general fund reserves of £691,000. ƒ  In 2003/04, the Council reported a surplus on the Collection Fund of £0.7 million which was transferred to the Collection Fund reserves. The carried forward Collection Fund reserves amounted to £2.58 million at 31 March 2004 (representing a 36% increase from the previous year) and are available to manage future council tax levels, to the extent that they are not already committed. ƒ  In 2003/04 the Council’s spending on capital schemes totalled £2.95 million representing an underspend of £2.7 million (47%) against the revised budget of £5.64 million. The underspend was the result of unplanned slippage on a number of schemes, some of which also experienced slippage in 2002/03. In our 2002/03 Audit Letter we reported the need to review overall project management and monitoring arrangements to ensure that the capital programme is deliverable and that any agreed variations to the capital budget during the year are realistic and achievable. The Council’s performance in 2003/04 indicates that the delivery of the capital programme to budgeted levels remains a challenge. However, the involvement of third parties in many capital schemes is a factor outside of the Council’s direct control that influences performance in this area and the fact that the Council is in a fortunate position with respect to available capital resources means that all approved projects can be carried out anyway.
  
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 ƒ  The Council’s overall level of reserves and provisions increased from £6.9 million at the end of 2002/03 to £7.7 million at the end of 2003/04 (an increase of £0.8 million or 11%). This increase was principally a result of the net impact of the reduction in the provision for doubtful debts of £0.3 million and the surpluses on the Collection Fund of £0.7 million and on the General Fund of £0.25 million. ƒ  The Council set a net budget of £8.2 million for 2004/05 as the amount to be met from government grants and local taxpayers, representing a decrease of £0.3 million against the budget requirement for 2003/04 of £8.5 million. The revised 2004/05 estimates included in the Long Term Financial Plan, presented to the Council’s meeting in March 2005 as part of the Medium Term Financial Strategy, indicated an increase in total service expenditure of £1.4 million, principally due to an increase in deferred charges of £1.3 million on the original estimate. However, this increase in total service expenditure was to be offset by an increase in the transfers from reserves, resulting in there being no impact on the amount to be financed by government grants and council tax payers. ƒ  The original 2004/05 budget agreed by members anticipated a surplus of £59,000 for the year and required a demand on the Collection Fund of £3 million, resulting in an increase of the council tax rate to £79.08 (2003/04: £75.32). The revised 2004/05 estimates included in the Long Term Financial Plan forecast a deficit of £212,000 for the year. ƒ  The Medium Term Financial Strategy developed by the Council covers the period from 2004/05 to 2009/10, and has been developed, at least in part, in response to the Council’s CPA review and forms part of the Council’s Improvement Plan. ƒ  At 31 March 2004, the General Fund Reserve stood at £2.9 million, comfortably above the Council’s desired minimum level of balance, which it has set at £1 million. The Council estimates that it will be possible to keep future council tax rises to the level of 4% or below for the full five year period of the Medium Term Financial Strategy whilst maintaining a balance on the General Fund Reserve of at least £1 million.  
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  We are pleased to report that overall the operation of the Council’s systems ƒ was sufficient to support our planned audit approach. ƒ  In the 2003/04 SIC the Council recognised that there is still progress to be made in strengthening its system of internal control and embedding the risk management processes. As a result The Council prepared an Interim SIC , with a view to having all of the assurances necessary to support a full SIC fully embedded during 2004/05. We reviewed the Council’s statement on internal control (SIC) as to whether it was misleading or inconsistent with other information known to us from our audit work and whether the disclosures given met the requirements of the Statement of Recommended Practice on Local Authority Accounting. Subject to a few minor amendments which were discussed and agreed with the Head of Accountancy and Financial Services, we found no areas of concern to report in this context. ƒ  Our review of Internal Audit’s work in 2003/04 identified some weaknesses in the execution and documentation of internal audit work that limited the reliance we were able to place on Internal Audit’s work in support of our audit of the 2003/04 financial statements. We discussed these weaknesses with the Head of Internal Audit and concluded that staff shortages and high staff turnover in Internal Audit were the main reasons that impacted upon the quality of Internal Audit work during the financial year 2003/04. We continue to work closely with Internal Audit to ensure that we can place the maximum reliance upon their work in support of our audit of the Council’s financial statements.  Our more recent reviews of the work of Internal Audit indicate a much more favourable position than was the case in 2003/04. ƒ  We are pleased to report that there are no issues arising from our audit work in relation to the Council’s standards of financial conduct and the prevention and detection of fraud and corruption or from our work on the legality of financial transactions that we need to bring to your attention. ƒ  We did not receive any questions or objections from local electors relating to the 2003/04 financial statements.  
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 Council Performance CPA and improvement  Along with other Staffordshire district councils, the Council was subject to the district council comprehensive performance assessment (CPA) process in 2003/04.  The Council was assessed as fair under the comprehensive performance assessment (CPA) framework. It scored well in seven of the ten themes assessed. The Council has clear ambitions and has established priorities for protecting the environment, being a safe place to live and keeping council tax low. There is a strong focus on service delivery of established priorities but corporate working on cross-cutting areas is not as strong. A performance management framework is in place and developing. The Council is in a strong financial position but there are constraints on capacity, for example gaps in skills which are being addressed. Investment is geared towards service improvement, for example recycling and waste minimisation. In response to the CPA report the Council has agreed a comprehensive improvement plan.  Each of the scored elements of the assessment is shown below:  Exhibit 1 CPA scores – Corporate Assessment  Ambition 3 Prioritisation 3 Focus 2 Capacity 3 Performance management 2 Achievement in quality of service 2 Achievement of improvement 3 Investment 3 Learning 3 Future plans 3  
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  Source CPA – Scoring - 1 (weak), 2 (weaknesses outweigh strengths), 3 (strengths outweigh weaknesses), 4 (strong)  The Council scored well in seven out of the ten themes assessed. CPA also considered two service areas, balancing the housing markets and public space. Both areas were assessed as having a low risk of needing improvement.   We will ensure that we work alongside the Council and other regulators to deliver a targeted audit and inspection programme which supports the Council’s improvement work. As part of this programme we will assess the Council’s progress in autumn 2005.  Best Value Under the Local Government Act 1999 we are required to carry out an audit of the Council’s Best Value Performance Plan (BVPP). We completed our audit work on the Council’s BVPP for the year ended 31 March 2005 and issued our opinion on the plan during December 2004. In our opinion, the Council had prepared and published its 2004/05 BVPP in all significant respects in accordance with section 6 of the Local Government Act 1999 and statutory guidance issued by the Government and hence we were able to give an unqualified opinion on the BVPP. Furthermore, on the basis of our audit work, there were no statutory recommendations to be brought to your attention.  During the year we followed-up the Council s progress in addressing the recommendations made in our 2002/03 Audit Letter in respect of Best Value , in particular with respect to:    the structure and content of the Best Value Performance Plan;  service planning;
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  target setting; and  action planning. We concluded that the Council was making progress in implementing the agreed actions in response to the recommendations made. We noted the following developments in particular. The Best Value Performance Plan In our 2002/03 Audit Letter we commented that the structure of the Best Value Performance Plan should be revised to report performance under each key aim or priority for the Council. We also recommended that the Council should include1. information on the progress and outcomes arising from improvement measures of all inspections undertaken. In response to our recommendations, the Council noted that the structure of the plan would be revisited as part of the preparations for publishing the 2005/06 plan and that the 2004/05 plan would report on the Best Value Inspection of Housing Services and Strategy. We were pleased to note that the plan for 2004/05 contained a comprehensive section on improvement measures, including a summary of the Best Value Inspection of Housing Services and Strategy. Service planning  In last year’s Audit Letter we recommended that the Council should ensure that the objectives of the Corporate Strategy were linked to the objectives set out within the Community Strategy and that the Council should develop a mechanism for demonstrating how the Council’s corporate priorities link to the medium term financial plan and service level objectives. The 2004/05 Best Value Performance Plan set out how the Council’s corporate objectives relate to the Community Strategy. The Council has also undertaken a review of its service plans to ensure that a standardised format is followed that reflects the new constitutional arrangements and demonstrates clear links to the Council’s key aims and objectives.  
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Target setting With respect to target setting we recommended that the Council should develop corporate guidance for target setting and underpin this with training for all relevant staff. The Council has taken action to address this. A training session was held for senior officers in March 2004 and we understand that as part of the new Best Value process, further guidance regarding target setting will be provided for all relevant officers and members. This guidance will then be supplemented by advice and support from the Corporate Policy Team. Action planning Performance against the Council’s Best Value Performance Indicators is reported each quarter. This includes comparing current performance with the same quarter from the previous year and the target for the current year. In this way, the Council can identify whether targets are being met. We understand that the Council is also in the process of developing a formal action planning process to address performance issues as identified through the reporting process. Following the Audit Commission’s Comprehensive Performance Assessment undertaken in 2004, the Council has also developed an Improvement Plan, which includes actions where required to achieve a step change in areas of under performance.               
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 Accounts and Governance
Accounts The purpose of our accounts work was to perform an audit of the final accounts of the Council, in accordance with approved Auditing Standards. The preparation of the annual accounts is a vital process in the stewardship of the Council, which should be performed on a timely basis. We are pleased to report that we were provided with a draft set of accounts on the first day of our final audit. The accounts presented for audit were substantially complete, and the Council was also able to meet the earlier deadline for the approval of the statement of accounts of 31 August 2004 .  In addition, the majority of working papers requested were made available during the course of our audit and staff were, in general, available to answer audit queries on a timely basis. Our audit identified a number of misstatements in the Council’s draft accounts submitted for audit. It has taken longer than both the Council and ourselves would wish for some of these issues to be resolved and we are working closely with the Head of Accountancy and Financial Services to ensure a more timely conclusion to the audit of the 2004/05 final accounts.  Statement of Auditing Standard (SAS) 610  The Statement of Auditing Standard (SAS) 610 - “Communication of audit matters to those charged with governance” requires us to communicate relevant matters relating to the audit of the financial statements to “those charged with governance” of the entity to enable them to take appropriate action. In the case of the Council we have agreed with you previously that matters relating to the audit of the financial statements should be communicated to the Council’s Scrutiny (Audit) Sub-Committee. 
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The majority of the misstatements referred to previously were of a relatively minor value or significance and agreement was reached to amend the accounts in relation to the majority of these issues. A number of the amendments proved more difficult to effect than others and resulted in a series of revisions to the accounts. However, there remain three, relatively minor, misstatements where the Council is not proposing to amend the accounts. These are set out in our “SAS 610 Report” which is due to be considered by the Council’s Scrutiny (Audit) Sub-Committee later this month. We are satisfied that the value of the unadjusted misstatements would not have a material impact on the financial statements as a whole and will not therefore, affect our audit opinion. However, the Scrutiny (Audit) Sub-Committee will be requested to consider formally the unadjusted misstatements set out in the SAS 610 report and to determine whether it would wish the accounts to be amended. If the accounts are not amended we will require a written representation from the Scrutiny (Audit) Sub-Committee explaining the reasons for not doing so. We have agreed the wording of a draft management representation letter with the Head of Accountancy and Financial Services. Subject to the satisfactory resolution of the unadjusted misstatements reported in the SAS 610 report and to us receiving signed originals of the approved accounts and the management representation letter referred to above, we will be issuing an unqualified audit opinion on the 2003/04 financial statements.   Accounting issues Financial Reporting Standard (FRS) 17: Retirement Benefits 2003/04 was the first year of full implementation of FRS 17. The FRS is concerned with identifying the real underlying financial position of a Council with regard to its participation in pension schemes.
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Preparation of the disclosures required the Council to commission expert advice from actuaries, via pensions fund independent and professionally qualified actuaries Hymans Robertson. This data has been used to present more detailed information about the Council’s longer-term financial position than has been the case previously. Based on our audit work, we are satisfied that the new pensions disclosures made in the 2003/04 financial statements are consistent with FRS17. The availability of information as required under FRS17 has provided the Council with advance information about the likely liabilities in relation to the underlying commitments that the Council has in the long-run to pay retirement benefits: Pension Liability 31/3/2004 31/3/2003 31/3/2002
£million £million £million Estimated employer assets 23.07 18.88 24.28  Present value of pension (28.76) (27.45) (26.29) scheme liabilities
Net pension liability (5.69) (8.57) (2.01)  
The local government pension scheme is a funded, defined benefit scheme, meaning that the Council and employees pay contributions into the Staffordshire County Council Pension Fund, calculated at a level intended to bala nce the pension liability with invested assets. As at 31 March 2004, the Council s share in the Fund was in deficit by £5.69 million, which represents a decrease in the deficit of £2.88 million from the previous year. The most recent valuation, as at 31 March 2004, has confirmed that the fund remains in deficit. The Council has recognised the impact of the pension deficit in its Medium Term Financial Strategy and members will be aware, therefore, that contribution rates will increase from the 2004/05 level of 5.6% to 17.7% over a six year period.  
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Financial Reporting Standard FRS 15: Tangible Fixed Assets The Statement of Recommended Practice for local authorities (SORP) is specific about the basis upon which the different categories of fixed assets should be valued. For land and buildings, it is accepted that only a professional valuer is properly qualified to make judgements in relation to the valuation basis. Valuers are assisted in their task by guidance issued by the Royal Institute of Chartered Surveyors (RICS) and valuations are expected to be supported by a certificate. For other assets, it is either the case that the specified basis for valuation is historical cost or that evidence of value is more easily obtained (e.g. price lists), in which case the balance sheet can be supported by tenable evidence from non-valuers.
The SORP arrangements allow that where a Council has several comparable assets (e.g. council dwellings or schools), the Beacon Principle can be used to value a small number of assets and extrapolate these values to all assets; and, unless there has been an exceptional change in value, assets are only required to be revalued every 5 years once a value has been certified. As at 31  March 2004, the Council carried out the 5-year revaluation of its fixed assets in accordance with SORP requirements. This resulted in a significant increase in the carrying value of its fixed assets of approximately £0.7 million. However, the Council had not reflected the revaluation of fixed assets in the balance sheet of its draft accounts presented to us for audit.
The Head of Accountancy and Financial Services agreed to adjust the accounts to reflect the new increased carrying value of its fixed assets. Financial standing In this section we comment upon the Council’s general financial standing taking into account both its performance during the 2003/04 financial year and its ability to meet known financial obligations. Set out below is a summary of the financial results for each of the Council’s revenue accounts (General Fund and Collection Fund) and the capital programme for the year ended 31 March 2004.  
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 General Fund  In 2003/04, the Council set a net budget requirement, after transfers from reserves, of £8.5 million (2002/03: £7.5 million) to be funded from government grants and local taxpayers. The budget required a transfer of £691,000 from general fund reserve balances in order to balance income and expenditure in the Consolidated Revenue Account in the year.  The Council’s actual spending against budget for 2003/04 is shown in the table below:                           
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 Budget Actual Variance £000 £000 £000       Service revenue expenditure 13,011 11,396 (1,615) Investment income (1,204) (1,052) 152 Capital financing costs (1,270) (1,205) 65 Pension Interest& Expected return on Pensions Assets 0 328 328 Net Operating 10,537 9,467 (1,070) Expenditure       Transfer from capital (1,300) (731) 569 financing reserve Transfers from (31) 94 125 revenue reserves Contribution from the 0 (559) (559) pension reserve       Amount to be met 9,206 8,271 (935) from Government Grants and Taxpayers       Funded by:       Income from (5,665) (5,665) 0 grants Demand on (2,850) (2,850) 0 Collection Fund        Total Income (8,515) (8,515) 0 (Surplus)/Deficit for 691 (244) (935) the year
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