Local Government 2018

Overview

The Auditor-General for New South Wales, Margaret Crawford, released her report today on the Local Government sector. The report focuses on key observations and findings from the 2017-18 financial audits of 135 councils in New South Wales and the 2016-17 audit of Bayside Council. The report also includes commentary on three performance audits published in 2018.

Unqualified audit opinions were issued on the 2017-18 financial statements of 135 councils. The audit opinion for Bayside Council’s 2016–17 financial statements was disclaimed as management were unable to confirm that the financial statements present fairly the performance and position of the Council. A further 24 councils required material adjustments to correct errors in previous audited financial statements. Three audits are still in progress and will be included in next year’s report.

Executive summary

This report analyses the results of our audits of financial statements of local councils for the year ended 30 June 2018. The table below summarises our key observations and recommendations.

1. Introduction

1.1 The Local Government sector

Local Government is the third tier of government. It is established under state legislation, which defines the powers and geographical areas each council is responsible for. There are 128 local councils and ten county councils in New South Wales.

Each council is a statutory corporation. Elected councillors form the governing body to direct council affairs in line with the Local Government Act 1993 and Local Government (General) Regulations 2005.

Local councils provide services and infrastructure for a geographical area. County councils are formed for specific purposes such as to supply water, manage flood plains or eradicate noxious weeds.

This report details the results of 2017-18 financial audits of 135 out of 138 councils. It also includes the result of the 2016-17 financial audit of Bayside Council which was completed this year.

In preparing this report, the comments and analysis are drawn from:

  • audited financial statements
  • our performance audit reports
  • data collected from councils
  • audit findings reported to councils
  • data from the Office of Local Government and the Australian Bureau of Statistics, including population, kilometres of roads and council area.

In NSW, councils are classified into four groups - metropolitan, regional, rural and county. Further details are provided in Appendix four.

1.2 Joint Organisations

On 30 November 2017, the NSW Government amended the Local Government Act 1993 (the Act) allowing councils in regional NSW to form Joint Organisations (JOs). The JOs will be required to prepare financial statements for audit by the Auditor‑General from 2018-19 onwards.

Eighty‑five councils in regional NSW are members of 13 Joint Organisations.

Notes:
  1. Metropolitan councils are excluded for Joint Organisations.
  2. Refer to Appendix seven for a list of the 13 Joint Organisations and their member councils.

The core activities of JOs include regional strategic planning and priority setting, regional advocacy and collaboration with the State and Australian Governments. In addition, JOs can also engage in shared services with neighbouring councils.

Our recent audit 'Shared Services in Local Government’ found most councils are not efficiently and effectively engaging in shared services. This is due to three main factors:

  • some councils do not have the skills and capability required to establish and manage shared arrangements
  • not all councils assess the performance of their current services before deciding on the best service delivery model
  • existing governance models used by councils to share services are not subject to the same checks and balances, risking transparency and accountability

There are opportunities under the Joint Organisation model for councils to engage more efficiently and effectively in shared services.

1.3 Service delivery

Councils invest significant resources to deliver a wide range of services to the community. These include waste collection, planning, child and family day care, and recreational services. Councils also build and maintain infrastructure, including roads, footpaths and drains, and enforce various laws.

Council services vary depending on community needs

While core functions, such as waste collection, are similar across councils, the range of services each council provides is variable. The mix is influenced by population density, demographics, the local economy, climate and geographic characteristics.

The following graphic shows councils’ expenditure by function in 2017-18.

Note: Appendix eight provides further information on council expenditure by function.

In 2017-18, councils collectively reported expenditure of $11.4 billion. A large proportion of these funds was spent on the following:

  • $2.2 billion on transport and communications, including sealed and unsealed roads, bridges, footpaths, parking areas and aerodromes
  • $2.0 billion for governance and administration, including corporate and support services, engineering works, council elections, meetings and policy‑making committees, members’ fees and expenses, subscriptions, public disclosures and legislative compliance
  • $1.9 billion on the environment, including waste management, sanitation and garbage, street cleaning, drainage and stormwater management, and environmental protection
  • $1.8 billion on recreation and culture, including public libraries, museums, art galleries, community centres, public halls and performing arts venues, sporting grounds and venues, swimming pools, parks, gardens and lakes.

1.4 Audit Office Annual Work Program

In addition to forming an opinion on the financial statements of councils, our audits examine a small number of specific topics across councils. We determine which topics to consider by looking for opportunities to improve public‑sector accountability, governance and administration. We also consider the risks and challenges to the Local Government sector and how these may be addressed during our audits.

This year, our 2017-18 financial audits focused on:

  • Procurement practices and contract management (see Chapter 3)
  • Controls over IT systems (see Chapter 4)
  • Valuation of infrastructure, property, plant and equipment (see Chapter 5).

The following performance audits are also underway and due to be completed this year:

  • Amalgamation: Managing staffing implications
  • Waste management in Local Government
  • Council's management of development assessments.

1.5 Interactive data tool

We have summarised key financial information included in all council audited financial statements into an interactive data tool.

This is designed to assist users of council financial statements to better understand and compare financial information across councils. It is available on our website and includes the following information for each council:

  • revenue, expenditure, operating result, asset and liability data
  • key financial performance and sustainability indicators
  • minimum, median and maximum values within selected council groupings.

While this information can assist users to compare and understand a council’s financial performance and position, a conclusion on good or bad performance cannot be drawn from this data alone.

The 2017-18 financial statement data used in the tool is summarised in Appendix five of this report. It excludes financial statement data for three councils as the audits have not been completed.

The Office of Local Government advised that the Minister for Local Government will consider releasing a website for councils to compare and benchmark council information. This may form part of the Office of Local Government’s future performance management framework.

2. Financial Reporting

Financial reporting is an important element of good governance. Confidence and transparency in Local Government decision making is enhanced when financial reporting is accurate and timely.

This chapter outlines our financial reporting audit observations across councils for 2018.

Observation Conclusions and recommendations
2.1 Quality of financial reporting

Unqualified audit opinions were issued for 135 out of 138 council's financial statements. The audits of three councils are in progress.

Three councils, with previously qualified audit opinions, resolved those issues during 2017–18.

Sufficient audit evidence was obtained to conclude the financial statements for 135 councils were free of material misstatement.

A disclaimed audit opinion was issued for Bayside Council’s 30 June 2017 financial statements as management were unable to confirm that the financial statements present fairly the performance and position of the Council.

We were unable to obtain enough evidence to support the financial results reported.

Bayside Council did not resolve all issues related to the former councils, resulting in a disclaimed audit opinion.

The 30 June 2018 financial audits reported:

  • 7 high-risk and 85 moderate-risk findings on financial reporting processes
  • financial statement adjustments for 60 prior period errors totalling $2.4 billion
  • 512 corrected and uncorrected errors totalling $1.4 billion. Most of these errors related to infrastructure, property, plant and equipment (IPPE).
Our audits continue to identify opportunities to improve the quality of councils’ financial reporting.
We reported 95 instances in our management letters where councils could be better prepared for the upcoming changes to accounting standards. To help councils implement the new standards, the Office of Local Government is running workshops, developing guidance and mandating options with the new standards for councils to adopt on transition.
2.2 Timeliness of financial reporting
One hundred and eleven councils lodged their 30 June 2018 audited financial statements to the Office of Local Government by the statutory deadline. Eleven more councils submitted financial statements on-time compared with the prior year.
Almost half of councils performed early financial reporting procedures including valuing IPPE before 30 June 2018. Councils performing early financial reporting procedures improved the timeliness of their financial reporting.


 

2.1 Quality of financial reporting

The Auditor General is required under the Local Government Act 1993 to issue an audit opinion on the following reports prepared by Councils.

General purpose financial statements include the financial position and performance for overall Council operations. Special purpose financial statements for declared business activities are required when councils provide services that compete with market participants. Special schedule 2 details the amount councils can levy for rates in the next financial year. This amount is capped by the rate peg limit set by the Independent Pricing and Regulatory Tribunal NSW.

Indicators of quality financial reporting include:

  • unqualified audit opinions
  • low number of errors in the financial statements
  • low number of reportable matters in our management letters
  • an effective project plan to complete the financial statements.

Unqualified opinions issued for 135 councils

One hundred and thirty five councils received unqualified audit opinions for their 30 June 2018 financial statements. An unqualified opinion means sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement and users can rely on them to make informed decisions. 

The unqualified audit opinion for Central Darling Shire Council's 30 June 2018 financial statements included an emphasis of matter because of material uncertainty about the Council’s ability to continue operating in the foreseeable future. Council used restricted funds for its general operations throughout the year, but received Ministerial approval to do so in June 2018.

Central Darling Shire Council
The Council used externally restricted water and sewerage funds for general operations during the 2017–18 financial year. Using externally restricted funds for other purposes requires Ministerial approval under the Local Government Act 1993. The Council only obtained Ministerial approval to use the externally restricted funds in late June 2018.
 

Qualified audit opinions resolved for three councils

The table below details how issues resulting in qualified audit opinions for 30 June 2017 financial statements were resolved during 2017-18.

Council Resolved qualified audit opinions
Junee Shire Council Fair value of roads, bridges, footpaths and bulk earthworks was adjusted at 30 June 2017 to incorporate revaluation results.
The Hills Shire Council Fair value of land under roads was adjusted from 1 July 2016 to account for restricted land use.
Yass Valley Council Prior period error was corrected by recognising financial assistance grants on receipt for 30 June 2017 and 30 June 2018.

Audit opinion for 30 June 2017 financial statements of Bayside Council was disclaimed

A disclaimed audit opinion was issued for the 30 June 2017 financial statements of Bayside Council.

Management were unable to confirm that the financial statements present fairly the financial performance and position of the Council due to the control deficiencies in the Council's financial accounting systems.

We were unable to obtain enough evidence to support the financial results reported.

Bayside Council

The Council did not maintain an adequate internal control environment and sufficient records to support accurate financial reporting. 

We reported nine extreme and four high-risk findings to management and those responsible for the governance of this council. These related to:

  • control weaknesses in manual journals, reconciliations, accounts payable, and payroll processes
  • inadequate and inconsistent accounting policies and procedures
  • inadequate accounting records in the fixed assets register relating to land, drainage assets, land improvements and other structures and roads
  • untimely recording of depreciation and capitalisation of assets
  • potential contamination of council property and the risk of misappropriation of council assets.

These significant control deficiencies contributed to the disclaimed audit opinion issued on the financial statements. 

Seven high risk findings on financial reporting processes

Our audits identified 133 issues related to financial reporting processes.
 

The high risk issues related to:

  • lack of reporting timetables, work plans, and quality assurance process for preparing the financial statements, which resulted in significant errors in the financial statements
  • insufficient resources and/or inexperienced staff involved with the financial statement process
  • incorrect accounting treatment of a joint operation which led to a prior period adjustment.

Some of the common issues include:

  • inadequate financial statement close process which led to submitting poor quality financial statements
  • not assessing the impact of the new accounting standards.

These findings typically impact on the quality of financial reporting. 

High number of errors continue to be identified

The table below shows the number and dollar value of errors identified in financial statements across NSW councils.

  Year ended 30 June 2018
  green check circle shape

 

red exclamation circle

 

yellow minus circle

 

Less than $5 million 181 283 28
$5 million to $15 million 21 12 18
$15 million to $30 million 7 1 4
$30 million to $50 million 2 1 3
$50 million and greater 4 0 7
Total number of errors 215 297 60
Total value of errors $1.0 billion $0.4 billion $2.4 billion
Key check circle green Corrected Errors red exclamation circle Uncorrected errors yellow minus circlePrior period errors

Source: Engagement Closing Reports issued to councils by the Audit Office.

The errors identified this year were the result of:

  • deficiencies in determining the fair value of infrastructure, property, plant and equipment
  • inappropriate and inaccurate assumptions used to measure liabilities and other accounting estimates
  • recognising assets for the first time
  • derecognising duplicate assets
  • incorrectly applying Australian Accounting Standards.

Councils corrected all identified material misstatements.

Councils need to implement five new accounting standards over the next two years

We reported 95 instances, in our management letters, where councils could be better prepared for the upcoming changes to accounting standards.

Changes in accounting standards can materially impact a council's financial statements. It is important councils review the impact of upcoming changes and have appropriate systems, processes and resources to prepare for them.

To help councils implement the new standards, the Office of Local Government is running workshops, developing guidance and mandating options for councils to adopt on transition.

AASB 9 ‘Financial Instruments’ introduces a simplified model for classifying and valuing financial assets. It also introduces a new method for calculating impairment (decreases in asset values), which may result in councils recognising impairment losses earlier. 

AASB 15 ‘Revenue from Contracts with Customers’ will change the timing and pattern for recognising revenue and increase related financial reporting disclosures.

AASB 1058 ‘Income of Not-for-Profit Entities’ provides guidance to help not-for-profit entities account for:

  • transactions conducted on non commercial terms
  • the receipt of volunteer services.

AASB 15 and AASB 1058 may significantly impact council’s financial statements, particularly when recognising grant income.

AASB 16 ‘Leases’ will change the way lessees recognise, account for and report operating leases in financial statements. With a few exceptions, such as low value and short term leases, existing operating leases will need to be recognised as ‘right of use’ assets with corresponding liabilities recorded and disclosed in the Statement of Financial Position.

Implementing the new accounting standards will take significant time and effort. Councils will need to:

  • review current contracts with customers, grant agreements, lease agreements and arrangements with private sector operators
  • ensure contracts and lease registers are complete
  • assess whether existing systems can capture the necessary information
  • train staff and ensure guidance is given to those who oversee financial reporting
  • consider the impact on stakeholders.

This will be an area of focus for our 30 June 2019 financial audits.

Improving presentation and relevance of financial reporting information

Accounting standard setters are moving towards simplifying and rationalising financial reporting disclosures. The 2017-18 Local Government Code (the Code) made some key improvements towards this objective, including:

  • allowing financial statement line items and notes with nil balances in the current and prior year to be removed
  • moving the accounting policies note from Note 1 to the relevant notes
  • repositioning and renumbering notes to be more user friendly
  • focusing disclosures on restrictions to cash and investments.

There are further opportunities to declutter the financial statements of councils. For example, the information on developer contributions and performance measures included in the Code are not required by Australian Accounting Standards.

The Audit Office performs an annual review of the Code and provides feedback to the Office of Local Government on where financial disclosures can be further streamlined or removed.

2.2 Timeliness of financial reporting

The Local Government Act 1993 requires councils to submit audited financial statements to OLG by 31 October or apply for an extension.

More councils submitted financial statements on time

One hundred and eleven councils (2016-17: 100 councils) submitted their 30 June 2018 audited financial statements by the statutory deadline. This improved by 11 per cent compared with the prior year. More amalgamated councils met the statutory deadline this year.

The graph below shows the lodgement dates of councils' financial statements.

While more councils lodged on time, 77 councils submitted audited financial statements to OLG during the last week of October 2018. Submitting the financial statements close to the statutory deadline can be risky as there is no contingency in the event of late and unforeseen issues. Three councils missed the statutory deadline without an approved extension from the Office of Local Government.

The Office of Local Government approved a reporting extension for 24 councils. The common reasons include challenges with resourcing, lack of financial records, delayed valuations and moving to new application systems. These issues had flow on impacts to audit resourcing and the ability to complete audits on time.

We are yet to issue an audit opinion on the 30 June 2018 financial statements of the following councils.

Council Approved lodgement extension date Reason for extension
Bayside Council 28 February 2019 Incomplete financial records of the former City of Botany Bay Council.
Hilltops Council 28 February 2019 The delay arose from consolidating and migrating financial data from 3 legacy systems into one new system for single entity reporting.
Maitland City Council 30 April 2019 Issues associated with the transition to a new corporate financial management system and rating module, valuation complexities associated with operational and community buildings and the revision of rehabilitation provisions for a landfill site with recently expanded capacity.

Next year's Report to Parliament will include the outcome of these incomplete audits. 

Sixty one councils performed early financial reporting procedures

This year, 61 councils brought forward some procedures, including:

  • completing infrastructure, property, plant and equipment valuations before 30 June
  • preparing proforma financial statements and associated disclosures
  • assessing the impact of complex and one off significant transactions.

Eighty five per cent of councils who performed some early close procedures submitted their financial statements within the statutory deadline. For the remaining 15 per cent, most did not prepare proforma financial statements.

It is important councils appropriately plan the financial reporting process to ensure statutory deadlines are met. We have included some better practice guidance below to assist councils to improve the quality and timeliness of their financial reporting.

  Better practice financial reporting
square green tick box Have a project timetable to effectively plan resources, assign key tasks and set timeframes. square green tick box Reconcile key general ledger accounts to subsidiary ledgers and other information such as fixed asset registers.
square green tick box Prepare proforma financial statements to enable early review of the format, adequacy of accounting policies and note disclosures, and declutter and remove unnecessary notes. square green tick box Engage the audit, risk and improvement Committee early to consider the financial statements, key accounting estimates and significant changes in accounting policies.
square green tick box Revisit the project plan regularly to identify and manage delays and key issues. square green tick box Assess the impact of new and revised accounting standards effective in the current and future years.
square green tick box Analyse budget variances and movements from prior year. square green tick box Document proposed action plan to resolve prior year audit issues.
square green tick box Organise and manage information requirements from internal and external parties, including valuation experts. square green tick box Document key assumptions and judgements used for estimates and financial statement preparation.
square green tick box Engaging early and openly with the auditors. square green tick box Assess the impact of material, complex and one-off significant transactions.
square green tick box

Have a clear plan to ensure valuations are managed and documented appropriately.

Conduct comprehensive revaluation of Infrastructure, property, plant and equipment (IPPE) by 30 June, including review of the outcomes for quality and reasonableness and resolving any queries.

Assess the fair value of IPPE not subject to a comprehensive revaluation by 30 June.

square green tick box Assess the impact of material, complex and one-off significant transactions.

One of the focus areas for the 2018-19 audits will be to encourage councils to complete financial statements earlier in the reporting period.

3. Governance and internal controls

Strong governance systems and internal controls reduce risks associated with managing finances, compliance and delivering services to ratepayers.

This chapter outlines the overall trends for council controls and governance issues, including the number of findings, level of risk and the most common deficiencies. Our audits do not review all aspects of internal controls and governance every year. We select a range of measures, and report on those that present heightened risks for councils to address.

Observation Conclusion or recommendation
3.1 Internal controls
The 30 June 2018 financial audits reported 83 high-risk findings. Recommendation: Councils should reduce risk by addressing high-risk findings as a priority.
Thirty-nine of these high-risk findings related to information technology. See Chapter 4. Control weaknesses in information systems may compromise the integrity and security of financial data used for decision making and financial reporting.
Several internal control findings were common across councils. There may be opportunities for councils to work together to address common findings through Joint Organisations or other avenues.
3.2 Governance
Ninety-seven councils have an audit, risk and improvement committee (85 at 30 June 2017). Proposed legislative changes will require councils to establish an audit, risk and improvement committee by March 2021.
Ninety-two councils have an internal audit function (86 at 30 June 2017). It is envisaged that the Local Government Act 1993 will require the establishment of an internal audit function in each council to support the work of the audit, risk and improvement committee.
Eighty-three councils do not have a legislative compliance policy and 94 councils do not have a legislative compliance register. Councils can improve their monitoring of compliance with key laws and regulations.
Eighteen councils do not have a risk management policy and 38 councils do not have a risk register. Risk is better managed when there is a fit-for-purpose risk management framework, register and policy to outline how risks are identified and managed.
Most councils have a procurement policy, a manual, and are providing training to relevant staff. Only 34 per cent of councils have a contract management policy. Councils with effective procurement and contract management reduce risks of error and fraud and achieve better outcomes for ratepayers.

3.1 Internal controls

Our financial audits focus on key internal controls that underpin the financial statements councils prepare each year. They assess whether key internal controls are designed, implemented and operating effectively to manage the risk of material error in the financial statements.

We report control deficiencies identified to management and those charged with governance of a council through our audit management letters. The issues are rated as extreme, high, moderate or low risk in accordance with the risk management framework in TPP 12 03 ‘Risk Management Toolkit for the NSW Public Sector’.

Source: Interim and final management letters for 30 June 2018 audits.

High risk findings

Our 30 June 2018 financial audits identified 83 high risk findings.

The deficiencies were assessed as high risk if they could significantly affect the councils' financial statements.

The high risk findings are in the following areas:

  • financial reporting (see Chapter 2)
  • information technology (see Chapter 4)
  • asset management (see Chapter 5)
  • revenue process
  • purchasing process
  • payroll process
  • treasury process
  • financial accounting 
  • governance. 

Revenue process

Our audits identified 126 internal control weaknesses related to revenue processes.

Source: Interim and final management letters for 30 June 2018 audits.

The high risk issues include:

  • multiple control deficiencies identified at one council in the rates process 
  • council displaying the previous year’s rates in the operational plan, which is a breach of the Local Government Act 1993
  • lack of controls over revenue received at a council owned caravan park
  • not reconciling the rates system to the Valuer General’s valuation report, increasing the risk of levying rates on incorrect land values.

Some of the common control weaknesses include:

  • outdated revenue policies and procedures
  • exception reports to detect irregular or unusual changes were not reviewed
  • inadequate segregation of duties in the revenue process
  • lack of review of changes to details in the rates master file
  • reconciliations not prepared or reviewed.

Purchasing process

Our audits identified 206 internal control weaknesses related to purchasing processes.

Source: Interim and final management letters for 30 June 2018 audits.

The high risk issues include:

  • inadequate controls over credit card usage, including the lack of a credit card policy, sharing of credit cards among staff and no formal review to acquit credit card expenditure
  • outdated delegation limits in the finance system
  • no formal procurement manual.

Some of the common control weaknesses include:

  • no review of credit card purchases
  • inappropriate use of purchase orders and/or not using purchase orders
  • deficiencies in the tendering process
  • inadequate segregation of duties in purchase and payables processes
  • reconciliations not prepared or reviewed.

The Minister for Local Government requested we conduct a performance audit over credit card usage at local councils given the alleged misuse of a corporate credit card at a rural council. This will be a key area of focus for our 2018-19 financial audits.

Payroll process

Our audits identified 123 control weaknesses related to payroll processes. 

Source: Interim and final management letters for 30 June 2018 audits.

The high risk issue related to not approving employee termination payments.

Some of the common control weaknesses include:

  • no review of changes made to the employee masterfile
  • no review of payroll reports and timesheets
  • reconciliations not prepared or reviewed
  • lack of processes in place to reduce excessive leave balances.

Treasury process

Our audits identified 123 internal control weaknesses related to treasury processes.

Source: Interim and final management letters for 30 June 2018 audits.

The high risk issue was a council breaching the Local Government Act 1993 by using restricted funds for an alternate purpose without Ministerial approval.

Some of the common control weaknesses include:

  • no review of bank reconciliations and long outstanding reconciling items
  • no review of daily cash receipts
  • outdated bank signatories.

Financial accounting

Our audits identified 104 internal control weaknesses related to financial accounting processes.

Source: Interim and final management letters for 30 June 2018 audits.

Both high risk issues were due to councils not reconciling key accounts.

Some of the common control weaknesses include:

  • no review of reconciliations
  • manual journals not being reviewed by an independent officer
  • the finance system not preventing the same officer from posting and approving manual journals
  • inadequate supporting documents for manual journals.

3.2 Governance

Our audits identified 174 control weaknesses related to corporate governance.

Source: Interim and final management letters for 30 June 2018 audits.

The high risk issues related to:

  • a restructure that significantly impacted the efficiency and effectiveness of council operations
  • over reliance on a single staff member at a rural council to ensure due process and controls are in place.

The common governance issues can be grouped into the following areas, and are explained further below:

  • audit, risk and improvement committees
  • internal audit
  • legislative compliance frameworks
  • procurement and contract management
  • risk management
  • fraud controls.

More councils have established audit, risk and improvement committees

An effective audit, risk and improvement committee is an important part of good governance. An effective committee helps councils to build community confidence, meet legislative and other requirements and meet standards of probity, accountability and transparency.

Twelve more councils established audit, risk and improvement committees during 2017-18 resulting in 97 councils having committees.

Changes outlined in Section 428A of the Local Government Amendment (Governance and Planning) Act 2016 will require the remaining councils to establish an audit, risk and improvement committee by March 2021.

For those councils with an audit, risk and improvement committee, we assessed their performance against better practice. The table below summarises our observations.

Audit, risk and improvement committee Percentage (%)
Committee has a charter 98
Chair of the committee is independent 94
Committee is advised of significant, complex or contentious financial reporting issues 90
Committee monitors progress in addressing internal and external audit recommendations 87
Majority of the committee members are independent 83
Committee reviews the enterprise risk register 81
Committee performs an annual self-assessment of its performance 48

More councils have established internal audit functions

Internal audit is another important element of an effective governance framework as it supports a risk and compliance culture. Internal audit provides assurance over council's governance practices and internal control environment and identifies where performance can improve.

Six more councils established an internal audit function during 2017-18 resulting in 92 councils having an internal audit function.

The Office of Local Government (OLG) intends to release a new internal audit framework for Local Government. It is envisaged the Local Government Act 1993 will require the establishment of an internal audit function in each council to support the work of the audit, risk and improvement committee. Before this guidance is released, councils can refer to Treasury Policy Paper 15-03 Internal Audit and Risk Management Policy for the NSW Public Sector.

For those councils with an internal audit function, we assessed their performance against better practice. The table below summarises our observations.

Internal audit functions Percentage (%)
Internal audit plan is documented 95
Audit, risk and improvement committee reviews the internal audit plan 90
Internal audit plan aligns with the enterprise risk register 85
Audit, risk and improvement committee assesses the performance of internal audit 61

The following graph shows the percentage of councils without an audit, risk and improvement committee and internal audit function by council type.

The councils yet to establish an audit, risk and improvement committee and internal audit function are mainly rural and county councils. Most metropolitan councils have an audit, risk and improvement committee and all have an internal audit function.

Councils need to improve practices to comply with key laws and regulations

A legislative compliance framework assists councils to capture and monitor compliance with key laws and regulations.

Our audits found:

  • 83 councils do not have a legislative compliance policy
  • 94 councils do not have a legislative compliance register.

Ineffective legislative compliance frameworks increase the risk of councils breaching legislation. This can attract penalties, affect service delivery and cause significant reputational damage.

A compliance framework should be tailored to the size and risk profile of a council.

The following graph shows the percentage of councils without a legislative compliance policy and register by council type.

This finding is prevalent across all council types. As councils have common legislation there is an opportunity to have common policies and share registers to reduce cost of implementing legislative compliance frameworks.

Some councils can improve risk management practices

Our audits identified:

  • 18 councils do not have a risk management policy
  • 38 councils do not have an enterprise risk register
  • 12 councils' risk registers do not align with their strategic objectives.

A risk management policy helps to provide a framework for managing risks. A risk register, aligned to strategic objectives, can be an effective tool to support decision making.

Councils may find it useful to assess risk management practices using the Audit Office's Risk Maturity Toolkit. The toolkit is based on the principles and guidance of International Standards on Risk Management AS/NZS ISO 31000:2009 Risk Management. The risk management toolkit needs to be applied in a way that is fit for purpose, considering the size and complexity of each council.

Most councils have a procurement policy, manual and train relevant staff

As outlined in the Audit Office Annual Work Program, a key focus area of our 2017-18 audits was to review councils’ procurement and contract management practices.

Councils spend substantial funds each year to procure goods and services. It is important there is appropriate probity, accountability and transparency in procurement to reduce the risk of unauthorised purchases, corrupt and fraudulent behaviour and value for money not being achieved.

Our audits identified:

  • 96 per cent of councils maintain a procurement policy
  • 69 per cent of councils have a documented procurement manual
  • 78 per cent of councils provide training to staff with procurement responsibilities.

We selected a contract over $150,000 for each council to assess procurement practices and the common findings are in the table below.

Procurement practices Percentage (%)
Tender evaluation panel members with incomplete conflict of interest declarations 33
Tenderers not disclosing conflicts of interest as part of the tender process 22
No evidence recorded on file to support the tender process 7

Most councils have a centralised contract register, but only 34 per cent have a contract management policy

Councils enter into numerous contracts which vary in nature, size and complexity.

Our audits identified:

  • 34 per cent of councils have a contract management policy
  • 78 per cent of councils maintain a centralised contract register.

The table below summarises our findings for council contract management practices based on the same selection of contracts over $150,000 for each council.

Contract management Percentage (%)
No contract management plan 67
Contract performance evaluation not performed 63
No risk assessment performed before entering into significant contracts 53
Contract variation not evaluated based on value for money grounds 50
Contract variations not approved by an officer with appropriate delegation 48
No key performance indicators to measure the contract performance 32
Contract payments are not linked to satisfactory contract performance 28
Non-action on unsatisfactory performance by contractors 24
Contract not entered into the contract register in a timely manner 23

Councils need to improve their fraud controls systems

The Audit Office of New South Wales’ recent performance audit ‘Fraud controls in local councils’ highlighted that councils often have fraud control procedures and systems in place, but are not ensuring people understand them and how they work. There is also significant variation between councils in the quality of their fraud controls.

Common weaknesses in councils’ fraud controls include:

  • not regularly reviewing their fraud control approach and tailoring it to their fraud risks
  • providing only limited information and training to staff on their responsibilities and how to report suspected frauds
  • providing limited information to the community on how they can report fraud in their councils.

The report recommended the Office of Local Government work with other state agencies to better use the data they collect on fraud to provide a clearer picture of fraud within councils.

4. Information technology

Councils increasingly rely on information technology (IT) to deliver services and manage information. While IT delivers considerable benefits, it also presents risks that council needs to address.

Our audits reviewed whether councils have effective governance and controls in place to manage key financial systems and IT service providers. This chapter summarises the following IT findings:

  • governance
  • IT general controls
  • managing service providers.
Observation Conclusion or recommendation
4.1 Governance
Ninety-four councils have not formalised all policies which manage key information technology (IT) processes. Of those policies that are formalised, 78 are not reviewed to ensure they are up to date. A lack of IT policies increases the risk of inappropriate and inconsistent practices.
Sixty-five councils do not register their IT risks and 44 councils do not regularly report IT risks to management and those charged with governance. Risks that are not communicated to senior management and those charged with governance may not be assessed and managed appropriately.
4.2 IT general controls
Most internal control deficiencies related to information technology processes and control environment. Control weaknesses in information systems may compromise the integrity and security of financial data used for decision making and financial reporting.
4.3 Managing service providers
Seventy-two councils outsource at least one IT function to a third-party service provider. Of these:
  • 26 councils did not have a complete and accurate list of IT service providers engaged, along with the corresponding services provided
  • 49 councils did not perform an adequate risk assessment before engaging the IT service provider
  • 51 councils did not have clearly defined key performance indicators (KPI) in the Service Level Agreements (SLA) with the IT service provider
  • 36 councils did not periodically assess the performance of the IT service provider.
Councils can more effectively manage IT service provider by:
  • maintaining inventory of IT service providers and services they provide
  • identifying and addressing risks
  • including KPIs in SLAs
  • monitoring performance.

4.1 Governance

IT governance refers to the strategies and frameworks, polices and processes used to oversee and manage IT risks.

IT policies need to be formalised and kept up-to-date

Ninety-four councils do not have IT policies over one or more of the following critical areas:

  • IT security
  • IT change management
  • IT incident and problem management
  • disaster recovery
  • business continuity.

For the councils with established IT policies, we found 78 policies are not reviewed in line with the council’s scheduled review date to ensure they are up to date.

It is important key IT policies are formalised and regularly reviewed to ensure emerging risks are considered and policies are reflective of changes to the IT environment.

Half of the councils do not identify, monitor or report on IT risks

Sixty-five councils do not have an IT risk register, and 44 councils do not regularly communicate IT risks to management and those charged with governance.

It is important IT risks are identified and appropriately managed as councils rely heavily on IT for service delivery and financial reporting.

4.2 IT general controls

IT general controls relate to the procedures and activities designed to ensure confidentiality and integrity of systems and data. These systems underpin the integrity of financial reporting.

As outlined in the Audit Office Annual Work Program, a key focus area for our 30 June 2018 audits was to review IT general controls relating to key financial systems supporting the preparation of council financial statements. In particular, those addressing:

  • user access management
  • privileged user access restriction and monitoring
  • system software acquisition, change and maintenance.

Our financial audits did not review all council IT systems. For example, IT systems used to support service delivery are generally outside the scope of our financial audit. However, councils should consider the relevance of our findings below to these systems.

Our audits identified 448 control weaknesses related to information technology.

Source: Interim and final management letters for 30 June 2018 audits.

The high-risk issues relate to privileged user access not being adequately restricted and monitored to identify suspicious or unauthorised activity.

The other issues identified can be grouped into the following areas:

  • managing user access to IT systems
  • controls over changes to IT systems.

We assessed the impact of the IT issues on our audits and alternate procedures were undertaken to provide assurance over the integrity of financial reporting.

Privileged access is not adequately restricted and monitored

Privileged access occurs when a person can change key system configurations and has wide access to system data, files and accounts. It is therefore essential that privileged access is restricted to only those who require it to perform their role and monitored to detect suspicious activity. The access should be protected with strong password controls to minimise the risk of the account being compromised. Issues found in this area contributed to the number of high-risk IT issues reported in our management letters.

We found:

  • 43 per cent of councils not appropriately restricting privileged access
  • 71 per cent of councils not appropriately monitoring privileged user account activities.

The graph below shows the percentage of councils with inadequate controls for managing privileged access to IT systems.

User access management to IT systems need to be improved

Information technology is often at the core of how councils deliver services. While IT can improve service delivery, the growing dependency on technology means councils face risks of unauthorised access and misuse.

Key areas of effective user access management are:

  • appropriate approval for new access and changes of access to IT systems
  • timely removal of access to IT systems
  • strong password controls to avoid user access being compromised.

The graph below shows the number of councils that do not have adequate controls over user access management.

We found:

  • 47 per cent of councils without appropriate controls for adding new users
  • 43 per cent of councils without appropriate user access removal controls
  • 43 per cent of councils without appropriate password controls
  • county councils had more issues across the three areas of user management.

The graph below shows the percentage of councils with inadequate user access management controls by council type.

Controls over IT system changes need to be improved

Changes to IT programs and related infrastructure components need to be appropriately authorised, performed and tested prior to implementation. This ensures changes are appropriate and in line with business requirements.

Weak system change controls expose councils to the risk of:

  • unauthorised and/or inaccurate changes to systems or programs
  • issues with data accuracy and integrity
  • inappropriately accepting contractual terms.

We found:

  • 23 per cent of councils implementing changes without appropriate approval
  • 36 per cent of councils without appropriate segregation of duties between the developer and the implementer of the change.

The graph below shows the percentage of councils with ineffective controls to manage changes to IT systems by council type.

4.3 Managing service providers

Councils are increasingly contracting out the delivery of key IT services to private sector providers. IT systems are increasingly complex, and the risks are often best mitigated by seeking specialist skills to enhance the council’s capability and capacity. However, even when the service is outsourced, the council remains accountable for risks, including:

  • interruptions caused by system outages
  • loss of confidential information caused by cyber security attacks and data security breaches
  • threats to business continuity from failures in core infrastructure
  • compliance threats where responsibilities between the council and service provider have not been clearly defined.

Councils need to improve the management of IT service providers

Effectively monitoring and measuring critical IT service provider performance ensures contracted services are being provided and value for money is obtained.

Our observations are summarised in the diagram below. 

5. Asset management

Councils are responsible for planning and managing a significant range of assets on behalf of the community. This chapter outlines our asset management observations across councils for 2018.

Observation Conclusion and recommendation
5.1 Asset management planning
All but six councils have an asset management strategy, policy and plan. However, 11 councils have not reviewed their asset management strategy, policy and plan in the last five years. Recommendation: Councils’ asset management policy, strategy and plan should comply with the requirements of the Local Government Act 1993 and the Integrated Planning and Reporting Guidelines issued by the Office of Local Government.
We found 86 instances where asset management strategies, policies and plans do not comply with the essential elements in the Integrated Planning and Reporting Guidelines released by the Office of Local Government.  
5.2 Asset valuation process
Our audits found:
  • 38 instances where councils did not reassess the fair value of assets with sufficient regularity
  • 24 instances where councils did not review valuation results.
Deficiencies in the asset valuation process can result in significant errors to the financial statements.
The deficiencies in the asset valuation process resulted in errors in financial statements of $2.6 billion, including $1.9 billion of prior period errors.  
We also identified:
  • 63 councils did not perform an annual review of the useful lives of their assets as required by Australian Accounting Standards
  • considerable variability in the useful lives of asset classes, such as road across councils
  • 16 councils with residual values for assets that are not expected to attract sales proceeds upon disposal, which is contrary with Australian Accounting Standards.
Depreciation may not be accurately recorded in the financial statements. It may also impact key sustainability indicators reported by the council.
5.3 Asset management systems
Our audits identified 64 instances where councils:
  • maintained multiple asset registers
  • had inaccurate or incomplete registers on uncontrolled manual spreadsheets
  • did not reconcile asset registers with the general ledger.
Weaknesses in asset management systems can impact the accuracy and completeness of asset data, resulting in errors to the financial statements.

Our audits identified discrepancies between the Councils' Crown land asset records and the Crown Land Information Database (CLID) managed by the NSW Department of Industry.

Five councils corrected $225 million of previously unrecorded Crown land assets.

Councils should regularly reconcile asset registers to the CLID and investigate discrepancies to ensure Crown land under their care and control is captured.
5.4 Rural fire-fighting equipment

Inconsistent practices remain across the Local Government sector in accounting for rural fire-fighting equipment.

A number of councils do not record rural fire-fighting equipment, meaning that a significant portion of rural fire-fighting equipment continues to not be recorded in either State or council financial records.

The Office of Local Government should continue to address the different practices across the Local Government sector in accounting for rural fire-fighting equipment. In doing so, the Office of Local Government should continue to work with NSW Treasury to ensure there is a whole of-government approach.

Asset overview

Councils own and manage a diverse range of assets to deliver services to the community. As at 30 June 2018, the combined carrying value of NSW council assets was $140 billion.

Asset management

Our audits identified 291 control weaknesses related to asset management processes.

Source: Interim and final management letters for 30 June 2018 audits.

The high-risk issues related to:

  • non-compliance with Australian Accounting standards such as:
    • failing to assess the fair value of infrastructure assets with sufficient regularity
    • recording residual values for certain infrastructure assets that cannot be sold
  • lack of quality assurance review of the asset valuation outcomes resulting in significant errors in the financial statements
  • multiple control deficiencies in the asset management process increasing the overall risk assessment, such as:
    • numerous errors when reconciling valuation reports to the general ledger
    • non-timely transfer of assets from work-in-progress to the fixed assets register
    • lack of an asset management strategy, policy or plan
    • reliance on manual asset registers, resulting in numerous errors requiring adjustment to the financial statements.

The common issues can be grouped into the following areas:

  • asset management planning
  • asset valuation
  • asset management systems.

5.1 Asset management planning

Asset management planning is important as it helps councils to manage assets appropriately over their life cycle and to make informed decisions on the allocation of resources.

Councils are required under Section 403 of the Local Government Act 1993 to incorporate asset management planning in its long-term resourcing strategy. This involves preparing an asset management strategy, policy and plan.

Most councils have an asset management strategy, policy and plan, but some require review

We found:

  • 6 councils without an asset management strategy, policy and plan (13 in 2016–17).
  • 11 councils have not reviewed their asset management policy, strategy and plan in the last five years. This increases the risk that these documents may not reflect councils’ current asset management practices.

The Integrated Planning and Reporting Guidelines issued by the Office of Local Government prescribes essential elements to be included in councils' asset management policy, strategy and plan.

We assessed councils' compliance against the essential elements for asset management planning.

Essential elements of asset management planning Number of councils not complying
1.1 The asset management strategy and plan must be for a minimum period of ten years. 13
1.2 The asset management strategy must include an overarching council endorsed asset management policy. 10
1.3 The asset management strategy must identify assets that are critical to the council’s operations and outline the risk management strategies for these assets. 15
1.4 The asset management strategy must include specific actions required to improve the council’s asset management capability and projected resource requirements and timeframes. 5
1.5 The asset management plan must encompass all the assets under a council’s control. 17
1.6 The asset management plan must identify asset service standards. 12
1.7 The asset management plan must contain long term projections of asset maintenance, rehabilitation and replacement costs. 14
1.8 Councils must report on the condition of their assets in their annual financial statements in line with the Local Government Code of Accounting Practice and Financial Reporting. --
  Total instances of non-compliance 86

Source: Integrated Planning and Reporting Manual for Local Government in NSW and Financial statement audits for the year end 30 June 2018.

More than half of these breaches were identified at rural councils. We reported all identified breaches to management of relevant councils recommending they improve the quality of their asset management strategy, policy and plan.

5.2 Asset valuation process

Asset valuation processes can improve

The Code and Australian Accounting Standards require councils to re-assess the carrying value of infrastructure assets with sufficient regularity to ensure it does not differ materially from fair value. Councils are required to comprehensively value each asset class at least every five years. If carrying values are not regularly assessed, it may result in significant errors in the financial statements.

The Audit Office Annual Work Program identified asset valuations as a key focus area for 30 June 2018 audits. We assessed the effectiveness of asset valuation process and the reasonableness of asset values reported in the financial statements.

Our audits identified:

  • 38 councils did not formally re-assess the carrying value of infrastructure assets with sufficient regularity
  • 24 councils did not undertake a quality assurance review over the asset valuation outcomes.

Deficiencies in the asset valuation process resulted in errors totalling $2.6 billion in the financial statements, including $1.9 billion of prior period errors. These were corrected prior to finalising the financial statements. A more robust asset valuation process may prevent errors caused by:

  • inaccurate information provided to the valuers
  • acceptance of key inputs and assumptions applied by the valuers, which were not supported
  • calculation errors in the valuation reports.

Valuing infrastructure assets is a complex process. It is important councils start the process early and ensure there is a clear plan to ensure valuations are managed and documented appropriately.

Councils may find it useful to assess their asset valuation practices against guidance released by NSW Treasury TPP 14-01 ‘Accounting Policy: Valuation of Physical Non-Current Assets at Fair Value’ and TPP 18-17 ‘FY18–19 Timetable for Agency Asset Valuations’. The guidance takes into account the unique nature of the not-for-profit public sector in New South Wales.

Useful lives of assets are not being reviewed annually

Our audits identified 63 councils that did not formally re-assess the remaining useful lives of infrastructure assets.

Australian Accounting Standards require the remaining useful lives of assets to be reviewed on an annual basis. This requires councils to assess the physical condition of its assets.

If a physical condition assessment is not performed with sufficient regularity, useful lives may not be reasonable, resulting in errors in the depreciation recorded in the financial statements. Regular condition assessments help to identify maintenance requirements and minimise service interruptions.

The useful lives of road assets vary across councils

The useful life of an asset is the length of time it should be available for use. The remaining useful life is the time left for a council to use an asset, largely influenced by its physical condition. The useful life estimates determine the amount of depreciation expense reported in councils’ financial statements.

Our audits found a lot of variability in the useful lives for roads reported by councils.

Some variability in the useful lives of roads can be expected due to different soil types, methods of construction, geography and the environment. However, these differences do not fully explain the large variation in the useful lives of similar assets across councils. This variability impacts the depreciation expense reported in the financial statements. This in turn may affect the key sustainability indicators reported by councils.

Sixteen councils recorded residual values for road and stormwater drainage assets

Australian Accounting Standards permit the recording of residual values for infrastructure assets only if the council expects to receive sales proceeds for the asset at the end of its useful life.

Sixteen councils are recording residual values for infrastructure assets, such as roads and stormwater drainage that are not expected to be sold at the end of their useful lives. This may understate the depreciation recorded for these assets and impact the key sustainability indicators reported by councils.

5.3 Asset management systems

Accuracy and completeness of asset data can be improved

Asset registers record key data on councils’ infrastructure, property, plant and equipment. Maintaining accurate asset records is important as it enables councils to have appropriate information to make decisions around asset management.

We have summarised the common issues reported in our management letters.

Asset management systems Number of issues reported
Non-timely recording of asset movements in the asset register 24
Spreadsheets storing asset data outside asset management systems without any controls to protect the data integrity 16
Completed works-in-progress not capitalised as assets on a timely basis 9
Asset registers not being reconciled with the asset management system 6
Assets recorded in incorrect asset classes in the asset registers 6
Asset registers with the same asset being recorded twice 5
Total number of instances 66

It is important councils regularly update asset registers, reconcile their asset registers with asset management systems and have suitable controls in place to ensure the integrity of manual spreadsheets.

Councils may not be recording all Crown land assets they control

The Department of Industry is responsible for overseeing the management of NSW Crown land under the Crown Lands Act 1989. The Department maintains the Crown Land Information Database (CLID) containing records of Crown land and the respective Crown land manager. Crown land includes parks, reserves, roads and cemeteries. Councils manage Crown land legally transferred to them and are responsible for its care and maintenance to meet community needs and protect reserves for future generations.

There are discrepancies between the CLID and council Crown land asset records. Nine councils fixed asset registers did not have a separate identifier for Crown land assets. We compared Crown land asset records at local councils with CLID and identified:

  • 43 per cent of councils had instances where one or more parcels were recorded in CLID as council managed, but the land was not recorded in the council’s register
  • 31 per cent of councils had one or more parcel recorded in the council register, but the land was not recorded in CLID as being managed by that council
  • 15 per cent of council’s records of Crown land were inconsistent with CLID for land size or description
  • 2 councils had not recognised any Crown land they manage and control.

Our 2018 Industry Report to Parliament recommended the Department of Industry confirm the completeness and accuracy of the CLID with Crown land managers to improve the reliability of its records.

During 2017–18 audits, five councils identified $225 million of previously unrecorded Crown land under their care and control. These land parcels were identified when reconciling asset registers with the CLID and operational asset management systems.

Councils should periodically reconcile asset registers to the CLID and investigate discrepancies to ensure Crown land under their care and control is captured.

This will continue to be a key area of focus for our 2018–19 audits.

From 1 July 2018, there were changes to the Crown Land Management Act 2016. Crown land managed by councils will be treated as community land, meaning councils will be required to have plans of management in place for these land assets. There is a transition period of three years. Therefore, it is important Crown land records are accurate and complete.

The OLG has released guidance materials and training programs to support councils transition to these new requirements. 

6. Financial performance and sustainability

Strong and sustainable financial performance provides the platform for councils to deliver services and respond to community needs.

This chapter outlines our audit observations on the performance of councils against the Office of Local Government's (OLG) performance indicators.

Observation Conclusions and recommendations
6.1 Operating performance and revenue measures 
Nineteen amalgamated councils received significant one-off grant funding in 2016–17. In 2017–18:
  • 8 amalgamated councils reported a negative operating performance (three in 2016–17)
  • 14 amalgamated councils met the own source revenue benchmark (eight in 2016–17).
The overall operating performance and revenue measures in 2017–18 for amalgamated councils were impacted by lower operational grant income.
Thirty-five of the 56 rural councils did not meet the benchmark for own source revenue (41 in 2016–17). The ability to generate own source revenue remains a challenge for rural councils. Rural councils have high-value infrastructure assets covering large areas, less ratepayers and less capacity to raise revenue from alternative sources compared with metropolitan councils.
6.2 Liquidity and working capital performance measures
Most councils met the liquidity and working capital performance measures over the last two years. Most councils:
  • can meet short-term obligations as they fall due
  • have sufficient operating cash available to service their borrowings
  • are collecting rates and annual charges levied
  • have the capacity to cover more than three months of operating expenses.
Nineteen additional councils would not meet the cash expense cover ratio benchmark when externally restricted funds are excluded. Councils with a higher proportion of restricted funds have less flexibility to pay operational expenses than the cash expense cover ratio suggests.

Each local council has unique characteristics such as its size, location and services provided to their communities. These differences may affect the nature of each council's assets and liabilities, revenue and expenses,and in turn the financial performance measures against which it reports.

The Office of Local Government prescribes performance indicators for council reporting.

The analysis in this chapter is based on performance measures prescribed in OLG’s Code of Accounting Practice and Financial Reporting (the Code).

Council’s audited financial statements report performance against six financial sustainability measures.

Operating performance and revenue measures

Operating performance
 
Measures how well councils keep operating expenses within operating revenue
 
Own source operating revenue Measures council’s fiscal flexibility and the degree to which it can generate own source revenue compared with the total revenue from all sources
 

Liquidity and working capital measures

Unrestricted current ratio Measures a council’s ability to meet its short-term obligations as they fall due
 
Debt service cover ratio Measures the operating cash to service debt including interest, principal and lease payments
Rates and annual charges outstanding percentage Assesses how successful councils are in collecting rates and annual charges
Cash expense cover ratio Estimates the number of months a council can continue paying its expenses without additional cash inflow
Building and infrastructure renewals ratio Assesses the rate at which infrastructure assets are being renewed against the rate at which they are depreciating
Infrastructure backlog ratio Shows the amount of infrastructure backlog expenditure relative to the total net book value of a council's infrastructure assets
Asset maintenance ratio Compares a council’s actual asset maintenance expenditure to the amount planned in their asset management plans
Cost to bring assets to agreed service level Compares the estimated cost to renew or rehabilitate existing infrastructure assets, that have reached the condition-based intervention level adopted by a council, to the gross replacement cost of all infrastructure assets

Each audited measure and three of the four unaudited measures has a prescribed benchmark.

 

6.1 Operating performance and revenue measures

The operating performance and revenue measures indicate whether councils:

  • keep operating expenses within operating revenue
  • generate sufficient own source revenue.

Overall more councils:

  • reported negative operating performance in 2017–18 compared with 2016–17
  • met the benchmark for own source operating revenue in 2017–18 compared with 2016–17.

The ability to generate own source revenue remains a challenge for rural councils.

Notes:
  1. Appendix nine provides a description of operating performance ratio and own source revenue ratio.
  2. Appendix eleven lists the performance of each council against operating performance and revenue measures.
Source: Audited financial statements for 2016–17 and 2017–18.

Operating performance and revenue measures for amalgamated councils were impacted by less operating grant income

In the prior year, amalgamated councils received one-off grant funding from the NSW Government's Stronger Communities Fund to assist councils with delivery of projects to improve community infrastructure and services. Each newly amalgamated council also received grant funding from the NSW Government's New Council Implementation Fund to assist councils to cover the up-front costs arising from amalgamation.

The drop in operating grant funding for the 19 amalgamated councils in 2017–18 resulted in:

  • 8 amalgamated councils reporting a negative operating performance in 2017–18 (three in 2016–17)
  • 14 amalgamated councils meeting the own source revenue benchmark (eight in 2016–17).

Rural councils continue to face challenges in generating own source revenue

In 2017–18, 35 rural councils did not meet the own source operating revenue benchmark (41 in 2016–17). The ability to generate own source revenue remains a challenge for rural councils. Rural councils have high-value infrastructure assets covering large areas, less ratepayers and less capacity to raise revenue from alternative sources compared with metropolitan councils. They have less capacity to generate revenue from alternative sources such as parking fees, property development and rental income.

6.2 Liquidity and working capital performance measures

The liquidity and working capital performance measures indicate whether councils can:

  • meet short term obligations
  • service their debt
  • collect outstanding rates and annual charges
  • meet their future expenses.

Most councils met the benchmarks for the liquidity and working capital performance measures over the last two years.

Notes:
  1. Cash expense cover ratio includes externally and internally restricted funds.
  2. Appendix nine provides a description of unrestricted current ratio, debts service cover ratio, rates and annual charges outstanding percentage and cash expense cover ratio.
  3. Appendix eleven lists the performance of each council against liquidity and working capital performance measures.
Source: Audited financial statements for 2017–18.

An additional 19 councils would not meet the cash expense cover ratio benchmark when externally restricted funds are excluded

Externally restricted assets are those affected by legislation or other externally imposed requirements. Internally restricted assets are affected by council resolution or policy, usually for an identified future works program. All other assets are unrestricted.

In 2017–18, all but one council had the capacity to cover more than three months of expenditure without extra cash inflows. Sixty-nine councils (51 per cent) had enough cash on hand to fund more than 12 months of expenditure. Another 54 councils (40 per cent) had enough cash to fund between six and twelve months of expenditure, and 11 councils (eight per cent) had enough cash to cover three to six months of expenditure. 

Source: Audited financial statements for 2016–17 and 2017–18.

Councils are not required to exclude externally and internally restricted funds when calculating the cash expense cover ratio.

If externally restricted funds are excluded from the cash expense cover ratio, an additional 19 councils will not meet OLG’s benchmark for the cash expense cover ratio.

To meet operational needs, councils with low unrestricted funds may need to:

  • borrow funds
  • seek approval from the Minister for Local Government to use externally restricted funds
  • look at ways to reduce expenditure or seek revenue from other sources.

6.3 Asset management performance measures

The asset management performance measures indicate how well councils maintain, renew and report on the condition and cost of infrastructure assets.

Overall:

  • most councils face challenges in meeting the asset management performance measures
  • no county councils met the building and infrastructure renewals ratio
  • less councils met the asset maintenance ratio in 2017–18 compared with 2016–17.
Notes:
  1. Four rural and seven county councils did not report the results of infrastructure renewals, infrastructure backlog and asset maintenance ratios.
  2. Appendix nine provides a description of building and infrastructure renewals ratio, infrastructure backlog ratio and asset maintenance ratio.
  3. Appendix eleven lists the performance of each council against asset management performance measures.
  4. OLG has not prescribed a benchmark for the 'cost to bring assets to agreed service level' performance indicator and is therefore excluded from the analysis.
Source: Unaudited Special Schedule 7 'Report on Infrastructure Assets' for 2016–17 and 2017–18.

Councils reported insufficient spending to renew and maintain infrastructure assets

Thirty-six councils reported they do not meet the benchmarks for either the buildings and infrastructure renewals ratio, the infrastructure backlog ratio or the asset maintenance ratio. These councils should examine how well they manage their assets and consider if their investment in maintaining and renewing infrastructure assets is sufficient. This assessment should be an input to future asset management plans.

Councils are required to have asset management plans that consider community needs, available funds, the council’s risk appetite, and the whole-of-life costs of owning and/or managing the infrastructure assets under their control.

Inconsistent calculation of the buildings and infrastructure renewals ratio

OLG’s Code requires the unaudited buildings and infrastructure renewals ratio to calculate renewal expenditure on specific infrastructure assets, excluding work-in-progress, as a percentage of depreciation, amortisation and impairment.

Thirty-six per cent of councils included work-in-progress assets when calculating the ratio. If work-in-progress assets are excluded from the calculation, a further eight councils would not meet the benchmark. This means 81 councils (65 per cent) did not meet the benchmark for renewing their assets. The inconsistency in the calculation of this ratio reduces the comparability of the buildings and infrastructure renewals ratio reported by councils.

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ERRATUM

Auditor‑General’s Report to Parliament
Report on Local Government 2018

15 April 2019

 

Executive Summary

The second point ‘Governance’ under point 3 ‘Governance and internal controls’ on page 2 should read:

There has been an increase in the number of councils with an audit, risk and improvement committee or an internal audit function compared with the prior year. Seventy per cent of councils have an audit, risk and improvement committee (62 per cent at 30 June 2017) and 67 per cent of councils have an internal audit function (62 per cent at 30 June 2017).

 

Chapter 3 Governance and Internal Controls

The two observations under 3.2 Governance on page 21 should read:

Ninety-seven councils have an audit, risk and improvement committee (85 at 30 June 2017).

Ninety-two councils have an internal audit function (86 at 30 June 2017).

 

Section 3.2 Governance on page 26 should read:

Twelve more councils established audit, risk and improvement committees during 2017–18 resulting in 97 councils having committees.

Six more councils established an internal audit function during 2017–18 resulting in 92 councils having an internal audit function.

 

Appendix three: Status of 2017 recommendations

Under the heading ‘Governance and internal controls’ on page 62, the two points in the right-hand column should read:

Twelve more councils established audit, risk and improvement committees during 2017–18 resulting in 97 councils having committees. Please refer to Section 5.2 for more details.

Six more councils established an internal audit function during 2017–18 resulting in 92 councils having an internal audit function.

 

The above changes are reflected on the Audit Office website, and should be considered the true and accurate version.