Posted on July 9, 2018 by Lindsay Taylor

Auditor-General’s Local Government Sector-Wide Audit Reports in 2018

At the end of June 2018, the Audit Office of New South Wales published the third  in a series of sector-wide financial and performance audit reports of councils in New South Wales by the Auditor-General. The reports were published between 1 February and 22 June 2018 and were prepared pursuant to s421C of the Local Government Act 1993. This post gives a brief overview of the three reports.

‘Council Reporting on Service Delivery – Performance Audit‘ – 1 February 2018 

This report is based on the annual reports of 105 councils across NSW. It focuses on how well councils report to their local communities on the services they provide.

The Auditor-General states that it aims to “enable benchmarking and provide improvement guidance to all councils across New South Wales”.

The key findings of this report include:

• Councils need to improve their reporting on the efficiency and effectiveness of service delivery, and their performance over time;
• Council should use targets in connection with objectives to better demonstrate what they wish to achieve with the delivery of their services;
• There was a significant difference in reporting performance between councils based on their location. This indicates that rural councils need more intensive support and guidance on service reporting.
• The Integrated Planning and Reporting Framework (Framework) has some weaknesses including that it does not require councils to report on their efficiency and cost effectiveness, and provides limited guidance on how its various reports and plans fit together.
• Council reporting to state government agencies should be consolidated and coordinated.

The recommendations in this report are directed to the Office of Local Government (OLG), which regulates councils in NSW. This report recommends that the OLG should, by mid-2018:

• issue additional guidance on good practice in council reporting. Such guidance should include information relating to the key findings of the report, e.g. information about reporting on performance against targets and outcomes, and reporting performance over time;
• commence work to consolidate the information reported by individual councils to state government agencies;
• progress the development of a Performance Measurement Framework and associated performance indicators that can be used in sector-wide performance reporting; and
• assist rural councils to develop their reporting capability.

‘Report on Local Government 2017 – Financial Audit‘ – 20 April 2018

This report is based on audits of eight councils’ 2015-16 statutory financial statements and 139 councils’ 2016-17 statutory financial statements. It focuses on the results of the 2016-17 audits.

According to the Auditor-General, this report “presents a consistent view of financial performance across the New South Wales local government landscape”. 

The report provides useful guidance for councils and recommendations to councils and the OLG relating to financial reporting, asset management, governance and internal controls.

The key findings of this report include:

• The quality and timeliness of councils’ financial reporting needs to improve;
• Eighteen councils’ operating expenses exceed current operating revenue, however, most councils have sufficient liquidity and working capital;
• There were 10 high risk issues relating to councils’ asset management and accounting practices;
• There were 7 high risk matters relating to asset valuations, including two that resulted in qualified audit opinions;
• Thirteen councils did not have an asset management strategy, policy and plan, which is required by the Framework;
• There were 17 high risk issues relating to governance, financial accounting, purchasing and payables and payroll matters; and
• There were 9 high risk issues relating to information technology.
• Forty-five councils do not have a legislative compliance framework. This increases the risk of councils breaching legislative requirements and potentially incurring penalties, affecting service delivery and causing significant reputational damage.

This report recommends that:

• OLG guidance for council year-end financial reporting needs to align with Australian Accounting Standards and be issued earlier;
• Councils must consider whether spending on existing infrastructure assets is sufficient to ensure they continue to meet service delivery standards;
• The accuracy of asset registers needs to be improved and all assets need to be reported in financial statements;
• The useful lives of assets need to be reviewed annually. This review should be supported by current condition assessments;
• Councils can strengthen polices and procedures to support critical business processes, practices for risk management, and compliance with key laws and regulations. For example, councils can improve monitoring compliance with key laws and regulations by adopting a legislative compliance framework, register and policy. Such a compliance framework should be tailored to the size of the council, but comprehensive enough to ensure compliance;
• Councils can improve internal controls over manual journals, reconciliations, purchasing and payables and payroll; and
• Controls over user access to IT systems need to be strengthened.

The Audit Office’s best practice model for a compliance framework can be found in section 8 of the Audit Office’s ‘Governance Lighthouse’, a best practice model of public sector governance.

‘Fraud Controls in Local Councils – Performance Audit‘ – 22 June 2018

This most recent report focuses on the effective implementation of fraud controls in local councils and identifies areas where fraud control can improve.

The councils’ fraud controls audit used the Audit Office’s 2015 Fraud Control Improvement Kit to assess how councils manage the risk of fraud.

The findings of this report are principally based on the results of a self-completed survey that was completed by 83 councils.

The key findings of this report include:

• The fraud control systems of many councils need to be improved. For example, councils currently do not conduct regular reviews to ensure that their fraud control approach is appropriate to the particular fraud risks that they face and only 29 of the surveyed councils provide regular fraud awareness training to existing staff;
• Five of the surveyed councils did not have a Public Interest Disclosure policy, although such policies are required under the Public Interest Disclosure Act 1994 (PID Act);
• Local communities are not given a clear picture of the overall level of actual fraud within councils, although councils and state entities collect extensive data on incidents of suspected fraud; and
• Comparative performance reporting on fraud control practice may drive better practice in councils.

The recommendations in this report are directed to local councils and the OLG.

The report recommends that Councils should:

• tailor fraud control plans to their circumstances and specific risks, and systematically and regularly review their fraud risks to keep their plans up to date;
• effectively communicate fraud risks, and how staff and the community can report incidents of suspected fraud; and
• ensure that they comply with the PID Act by adopting a Public Interest Disclosure policy.

The report recommends that the OLG should:

• include performance measures for fraud control practice in the performance measurement framework for councils that it has recently started to develop;
• work with councils to ensure that they comply with the PID Act;
• work with state entities and councils to develop a common approach to how fraud complaints and incidences are defined and categorised so that they can better use data to report on levels of fraud within councils and measure the effectiveness, and drive the improvement of, councils’ fraud control systems.

A fourth report on councils’ shared services is expected to be published later in 2018.

To discuss this blog, please contact Lindsay Taylor, Senior Partner on 8235 9701.