What the report is about
Results of the local government sector council financial statement audits for the year ended 30 June 2020.
What we found
Unqualified audit opinions were issued for 127 councils, 9 county councils and 13 joint organisation audits in 2019–20. A qualified audit opinion was issued for Central Coast Council.
Councils were impacted by recent emergency events, including bushfires and the COVID-19 pandemic. The financial implications from these events varied across councils. Councils adapted systems, processes and controls to enable staff to work flexibly.
What the key issues were
There were 1,435 findings reported to councils in audit management letters.
One extreme risk finding was identified related to Central Coast Council’s use of restricted funds for general purposes.
Fifty-three high risk matters were identified across the sector:
- 21 high risk matters relating to asset management
- 14 high risk matters relating to information technology
- 7 high risk matters relating to financial reporting
- 4 high risk matters to council governance procedures
- 3 high risk matters relating to financial accounting
- 3 high risk matters relating to purchasing and payables
- 1 high risk matter relating to cash and banking.
More can be done to reduce the number of errors identified in financial reports. 61 councils required material adjustments to correct errors in previous audited financial statements.
Rural fire fighting equipment
Sixty-eight councils did not record rural fire fighting equipment worth $119 million in their financial statements.
The NSW Government has confirmed these assets are not controlled by the NSW Rural Fire Service and are not recognised in the financial records of the NSW Government.
What we recommended
The Office of Local Government should communicate the State's view that rural firefighting equipment is controlled by councils in the local government sector, and therefore this equipment should be properly recorded in their financial statements.
Central Coast Council
A qualified opinion was issued for Central Coast Council (the Council) relating to two matters.
Council did not conduct the required revaluation to support the valuation of roads.
Council also disclosed a prior period error relating to restrictions of monies collected for their water, sewer, and drainage operations, which, based on the NSW Crown Solicitor’s advice, should be considered a change in accounting policy.
What we recommended
The Office of Local Government should clarify the legal framework relating to restrictions of water, sewerage and drainage funds (restricted reserves) by either seeking an amendment to the relevant legislation or by issuing a policy instrument to remove ambiguity from the current framework.
Key financial information
In 2019-20, councils:
Please contact Ian Goodwin, Deputy Auditor-General on 9275 7347 or by email.
At a glance
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.
At 30 June 2020, there were 128 local councils, nine county councils and 13 joint organisations in New South Wales.
Councils provide a range of services and infrastructure for a geographical area. Services 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. While core functions such as waste collection are similar across councils, the range of services each council provides can vary depending on the needs of each community.
County councils are formed for specific purposes, such as to supply water, manage flood plains or to eradicate noxious weeds.
Joint organisations (JOs) are formed by councils in regional New South Wales. Core activities of JOs include regional strategic planning and priority setting, engaging in shared services with member councils and regional advocacy and collaboration with the State and Commonwealth Governments.
This report details the results of the:
- 2019–20 financial audits of 128 councils, nine county councils and 13 joint organisations
- 2018–19 financial audits of Hilltops Council, MidCoast Council and Murrumbidgee Council, which are now completed.
In preparing this report, the comments and analysis are drawn from:
- audited financial statements
- performance audit reports
- data collected from councils
- audit findings reported to councils in audit management letters.
Each local council has unique characteristics such as its size, location and services provided to their communities. To enable comparison, we divided councils into three categories – metropolitan, regional and rural. County councils and joint organisations are separately identified in the report. Details of councils grouped into categories are provided in Appendix four.
1.2 Impact of emergency events during 2019–20
Councils were significantly impacted by emergency events, including drought, bushfires, floods and the COVID-19 pandemic. At 30 June 2019, the NSW Department of Primary Industry reported that 97.6 per cent of New South Wales was drought affected. These dry conditions combined with intense heat over the 2019–20 summer sparked a catastrophic bushfire season, which caused extensive damage across New South Wales. Following on from the bushfires, torrential rain fell on parts of New South Wales in February 2020, resulting in widespread flooding. Then in March 2020, COVID-19 was declared a pandemic by the World Health Organisation, resulting in restrictions to suppress the spread of this virus.
The impacts of these emergency events on councils are explored further in Chapter 3 'In focus: response to recent emergency events'.
1.3 Financial and performance audit key areas of focus
In addition to forming an opinion on the financial statements of councils, the 2019–20 audits also examined a number of specific topics across councils. The topics were selected based on the risks and challenges to councils, and consideration of opportunities to improve public-sector accountability, governance and administration.
The 2019–20 financial audits focused on:
- quality and timeliness of financial reporting (see Chapter 2)
- council response to recent emergency events (see Chapter 3), including:
- financial implications
- changes to operating models including processes and controls
- accessibility to technology and the maturity of systems and controls to prevent unauthorised and fraudulent access to data
- delivery of new or expanded projects, programs, or services at short notice
- information technology general controls (see Chapter 4)
- infrastructure, property, plant and equipment (see Chapter 4)
- landfill rehabilitation (see Chapter 4).
The 2019–20 performance audits focused on:
- governance and internal controls over local infrastructure contributions
- credit card management in Local Government
- procurement management in Local Government.
Financial reporting is an important element of good governance. Confidence in and transparency of public sector decision making are enhanced when financial reporting is accurate and timely.
This chapter outlines audit observations related to the financial reporting of councils and joint organisations.
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.
Indicators of quality financial reporting include:
- unqualified audit opinions
- number of errors in the financial statements
- timeliness in preparing financial statements.
Unqualified audit opinions were issued for all but one council
Except for Central Coast Council, unqualified audit opinions were issued for all council and joint organisation audits in 2019–20. Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement and were prepared in accordance with accounting standards and the Local Government Act 1993.
Three unqualified opinions issued on the 2018–19 audits
Three financial audits from the previous year were not completed at the time of tabling the 'Local Government 2019' report in Parliament. We subsequently issued unqualified opinions for the 2018–19 financial audits of Hilltops, MidCoast and Murrumbidgee councils.
Bayside Council received an unqualified audit opinion for the first time in 2019–20
|Bayside Council||Council was able to resolve the issues that resulted in disclaimed audit opinions in prior years, since the merger of the City of Botany Bay and Rockdale City councils on 9 September 2016. This included addressing significant control deficiencies in Council's financial systems and having sufficient evidence to support the completeness and accuracy of stormwater drainage assets.|
Qualified audit opinion issued for Central Coast Council
A qualified audit opinion was issued for the 30 June 2020 financial statements of Central Coast Council. The audit opinion included two qualification matters:
Valuation of roads, bridges and footpath assets
Council recognised $1.4 billion of roads, $37.1 million of bridges and $99.1 million of footpath assets within ‘Infrastructure, property, plant and equipment’ in the Statement of Financial Position at 30 June 2020. In the Statement by the Interim Administrator and Management, the council certified that they were unable to provide sufficient evidence to support the carrying value of these assets.
This is because the last valuation of these assets was in the year ended 30 June 2015, and the council has not conducted a more recent valuation in accordance with AASB 116 ‘Property, Plant and Equipment’ (AASB 116). As a result, this is a limitation on the scope of the financial statement audit, which meant our audit was unable to obtain sufficient appropriate audit evidence to demonstrate the roads, bridges and footpath assets were measured at fair value in accordance with AASB 116 in the Statement of Financial Position at 30 June 2020, or determine the impact on the Statement of Comprehensive Income for the year ended 30 June 2020.
Correction of errors relating to a previous reporting period
Council disclosed a correction of error in Note 16(b) ‘Correction of errors relating to a previous reporting period’ of the financial statements. This disclosure resulted from a change in the council’s interpretation of the relevant legislation. For the reasons described below, this is a change in accounting policy and not an error.
Accounting for water and sewerage restricted funds (restricted reserves)
The water, sewerage and drainage arrangements for Central Coast Council are unique compared to all councils in New South Wales, as they are regulated under the Water Management Act 2000 (Water Management Act) when they operate as a water supply authority. For all other councils, these arrangements are regulated by the Local Government Act 1993 (Local Government Act).
Prior to the 2017 merger, both the Wyong Shire and Gosford City Councils operated water supply authorities to deliver water, sewerage and drainage services. This continued when the councils were amalgamated, and the Central Coast Council was established as a water supply authority.
The former Wyong Shire and Gosford City Councils determined that cash, cash equivalents and investments associated with their Water Supply Authority’s operations were 'unrestricted'. The former councils’ final financial statements for the period ended 12 May 2016 disclosed these amounts as unrestricted cash, cash equivalents and investments in the relevant note disclosures.
The decision was based on the councils being regulated by the Water Management Act when operating as a water supply authority. The Water Management Act has no explicit restrictions stating how money raised through charges levied under the Water Management Act are to be used. This is in contrast to money raised through charges for water and sewerage levied under the Local Government Act.
On 21 December 2016, Central Coast Council formally adopted the audited 2015–16 financial statements for the former Wyong Shire Council and the former Wyong Shire Council Water Supply Authority. The resolution to adopt the financial statements included the following paragraph:
On review of Council’s current restrictions for its water and sewer operations, Council has de-recognised certain cash, receivable and payable restrictions, in line with the current restriction disclosures recorded in the Financial Statements of Wyong Water. This change was corrected in the prior period in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
These financial statements were then submitted to OLG in their capacity as the regulator of local councils.
The interim administrator’s 30-day interim report on 2 December 2020 stated that, in his opinion, the Water Fund Externally Restricted Reserves and the Sewer Fund Externally Restricted Reserves were both understated. He appears to have taken this view because he did not believe that the approach taken by the former administrator in 2016 and formally adopted by the merged council was lawful. Because of these two different views, the Audit Office asked the NSW Crown Solicitor to provide an opinion on the following question:
Is the money received under the Water Management Act considered ‘externally restricted funds’ under s. 409(3) of the Local Government Act?
The NSW Crown Solicitor's preferred view, noting that view is not without doubt, is that 'monies received by the Central Coast Council as a result of charges levied in its capacity as a water supply authority under the Water Management Act should be held in the Council’s consolidated fund as ‘externally restricted funds’. The NSW Crown Solicitor said:
Whilst not without doubt, I prefer the view that money received under the WM Act is within the scope of s. 409(3) of the LG Act. The Central Coast Council is, as noted above, a WSA under the WM Act and specifically it is a statutory body named in Part 2 of Schedule 3 of that Act as such. Per s.287(2) of the WM Act, it therefore ‘becomes a water supply authority but still has its other functions’. That is, it retains its character as a council under the LG Act.
For monies received under the Water Management Act by the Central Coast Council to be considered as ‘externally restricted funds’, the money must be captured by the provision in either section 409(3)(a) or section 409(3)(b) of the Local Government Act.
In support of her preferred view, the NSW Crown Solicitor notes in respect of s409(3)(a):
Although not without doubt, I prefer the view that s. 409(3)(a) should be read in its full generality and not confined as relating only to special rates or charges levied under the Local Government Act.
On balance, I prefer the view that s. 409(3)(a) could apply to money received pursuant to the Water Management Act.
Further the NSW Crown Solicitor notes in respect of section 409(3)(b):
Section 409(3)(b) of the Local Government Act may apply to monies collected pursuant to the Water Management Act if the conditions in that paragraph are satisfied.
...it is difficult to envisage that there is very much scope for discretion in the spending of monies collected pursuant to the Water Management Act…..the whole legislative scheme as applying to the Central Coast Council in its capacity as a water supply authority acts to restrain and control the ways in which it raises money for its operations.
This means that the NSW Crown Solicitor’s preferred view supports the position taken by the current administrator.
However, the NSW Crown Solicitor's advice reflects the complexity of this issue and notes that the 'preferred view' is not without doubt. In doing so, the NSW Crown Solicitor also noted that there is an alternative view.
The NSW Crown Solicitor says in respect of section 409(3)(a):
However, the contrary view that s. 409(3)(a) is confined to special rates and charges levied under the LG Act, is not without merit. In particular, I have considered that the concept of a ‘special rate’ is a creature of the LG Act and a term with a clear meaning in the context of that Act specifically. Whilst this is not also true of the concept of a ‘charge’, for which many provisions in other Acts provide, I am not sure that a charge in any other Act would necessarily be associated with use for a specific purpose, in the way that paragraph (a) assumes and which I consider applies in the context of the LG Act.
The NSW Crown Solicitor goes on to say in respect of section 409(3)(b):
I have not located any express provisions in the Water Management Act which restrict the way that money collected under the Water Management Act can be spent, in a way which is comparable to the effect of s. 409(3) of the Local Government Act.
As outlined by the NSW Crown Solicitor, there is merit to the argument that money received under the Water Management Act is not externally restricted for the purposes of the Local Government Act.
The NSW Crown Solicitor has confirmed that the 2016 position adopted by Council was not without merit and that there was an arguable position that the water and sewer funds were not restricted.
The Audit Office met with staff from OLG to confirm if there were any other legal instruments or directions that could influence the facts as presented in the NSW Crown Solicitor’s advice. OLG has confirmed that there are no other legal instruments or directions that would alter the Crown Solicitor's advice.
The current administrator has advised that they have received a legal opinion from a private sector firm. The private sector firm's opinion has not been made available to the Audit Office.
The full opinion of the NSW Crown Solicitor can be found at Appendix two.
Accounting implications for the financial statements for the periods ended 12 May 2016 and 30 June 2017, and years ended 30 June 2018 and 2019
It is the responsibility of management, with the oversight of those charged with governance, to prepare financial statements in accordance with the relevant requirements. A misstatement in the financial statements can occur when there is a clear non-compliance with a prevailing law or regulation that impacts the reported amounts or disclosures.
In the final Wyong Shire Council and Gosford City Council financial statements for the period ended 12 May 2016, the councils reasonably argued that water, sewerage, and drainage funds collected by Wyong Shire Council and Gosford City Council as water supply authorities were not restricted. The then auditors accepted this position. This interpretation of the relevant Acts was also applied in the Central Coast Council financial statements for the period ended 30 June 2017 and years ended 30 June 2018 and 30 June 2019.
As there are reasonably arguable interpretations of the relevant legislation, as described by the NSW Crown Solicitor in the preferred and alternative views, there was, in our view, no 'non-compliance' with the prevailing laws and regulations when Wyong Shire Council and Gosford City Council determined to treat certain funds as not 'restricted'. Therefore, the treatment in prior years was not an 'error' as defined by AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, and the externally restricted funds disclosed in the financial statements of the Central Coast Council for the period ended 30 June 2017 and years ended 30 June 2018 and 30 June 2019 were not materially misstated.
The uncertainty created by more than one reasonably arguable legal interpretation is acknowledged. However, oversight of compliance with legislative requirements highlights a continuing governance risk for the Central Coast Council. Our recent performance audit 'Governance and internal controls over local infrastructure' highlighted that Central Coast Council also breached the Environmental Planning and Assessment Act 1979 between 2001 and 2019 when it used developer contributions for administration costs.
The ambiguity that exists by having two reasonably arguable interpretations of the relevant legislation should be clarified
The OLG should clarify the legal framework relating to restrictions of water, sewerage and drainage funds (restricted reserves) by either seeking an amendment to the relevant legislation or by issuing a policy instrument to remove ambiguity from the current framework.
Errors identified through audits
Increase in the number and dollar value of errors identified
Our audits identified more errors, both in number and value, compared to the prior year. It is important that councils have robust review processes to minimise the number of errors identified in financial statements. There were 20 councils (2018–19: 23 councils) where no errors were identified in their financial statements.
A corrected error is an error identified by the auditor or council, which is subsequently corrected by council in the financial statements.
|Corrected errors||By council type (2020 only)|
|Year ended 30 June||2019||2020||Metro||Regional||Rural||County||JO|
|Less than $250,000||75||60||5||3||38||8||6|
|$250,000 to $500,000||20||25||7||2||15||‑‑||1|
|$500,000 to $1 million||20||41||5||11||24||‑‑||1|
|$1 million to $5 million||48||69||16||20||31||2||‑‑|
|$5 million to $15 million||12||27||11||9||7||‑‑||‑‑|
|$15 million to $30 million||6||8||3||4||1||‑‑||‑‑|
|$30 million to $50 million||3||5||3||1||1||‑‑||‑‑|
|$50 million and greater||1||3||‑‑||1||2||‑‑||‑‑|
|Total number of errors||185||238||50||51||119||10||8|
|Total value of errors ($ million)||547||1,070||345||392||327||4||2|
Of the 238 corrected errors identified in the 30 June 2020 financial statements, eight were greater than $30.0 million:
|Council||Description of corrected error|
|Armidale Regional Council||Council incorrectly accounted for a $40.4 million asset disposal as part of a boundary adjustment. It was recorded in retained earnings through other comprehensive income, rather than in the income statement.|
|Central Coast Council||Council did not update its crown and community land to reflect the most recent New South Wales Valuer-General's valuations as at 1 July 2019, resulting in an understatement of $39.4 million.|
|City of Canada Bay Council||Council did not accurately assess the revenue recognition of a project in accordance with the Australian Accounting Standard, AASB 15 'Revenue from Contracts with Customers', resulting in an understatement of deferred revenue of $41.5 million.|
|City of Parramatta Council||Council's revaluation of operational land was overstated by $37.9 million as the incorrect methodology was used to value the land.|
|Gilgandra Shire Council||Council's revaluation of roads, bridges and footpaths was overstated by $50.0 million due to the incorrect recording of revaluation journal entries into the financial system.|
|Narrandera Shire Council||Council's income statement was understated by $30.2 million as the asset revaluation decrement for roads and footpaths was initially processed through the income statement rather than the asset revaluation reserve.|
|Upper Hunter Shire Council||Council's revaluation of bulk earthworks was overstated by $72.6 million due to calculation errors identified in the asset revaluation workpapers.|
|Wingecarribee Shire Council||Council's revaluation of roads, bridges and footpaths was understated by $117.0 million due to errors in recording asset information into the system.|
The common areas where corrected errors were identified are outlined below.
|Common corrected errors||Number of councils|
|Asset revaluation errors, such as:
|Incorrect application of the revenue accounting standards||42|
|Quality of asset records, such as:
An uncorrected error is an error identified by the auditor or council in the financial statements, which has not been corrected by council. There are various reasons why errors are not corrected, the most common being it is not material to the financial statements taken as a whole.
|Uncorrected errors||By council type (2020 only)|
|Year ended 30 June||2019||2020||Metro||Regional||Rural||County||JO|
|Less than $250,000||99||94||1||20||64||8||1|
|$250,000 to $500,000||31||43||3||14||25||1||‑‑|
|$500,000 to $1 million||27||33||5||15||13||‑‑||‑‑|
|$1 million to $5 million||57||78||21||30||27||‑‑||‑‑|
|$5 million to $15 million||8||3||1||‑‑||2||‑‑||‑‑|
|$15 million to $30 million||-‑||1||1||‑‑||‑‑||‑‑||‑‑|
|Total number of errors||222||252||32||79||131||9||1|
|Total value of errors ($ million)||211||254||76||86||90||1||1|
Twenty-seven per cent of uncorrected errors were due to unrecorded rural fire fighting equipment
In 2017, we recommended that OLG should address the different practices across the Local Government sector in accounting for rural fire fighting equipment.
In 2019–20, 68 councils did not record rural fire fighting equipment in their financial statements worth $119 million.
The financial statements of the NSW Total State Sector and the NSW Rural Fire Service do not include these assets. NSW Treasury and the NSW Rural Fire Service have stated that rural fire fighting equipment is not controlled by the State.
The non-recording of rural fire fighting equipment in financial management systems increases the risk that these assets are not properly maintained and managed.
RecommendationOLG should communicate the State's view that rural fire fighting equipment is controlled by Councils in the Local Government sector, and therefore this equipment should be properly recorded in their financial statements.
The Department of Planning, Industry and Environment, which includes OLG, has confirmed that the NSW Rural Fire Service does not control rural fire fighting equipment. It is now the responsibility of the OLG to determine what action will be taken to ensure that $119 million of assets held by 68 councils are properly recorded and accounted for.
Number of prior year (prior period) financial statement errors increased, but the total dollar value has decreased compared to prior year
A prior period financial statement error is an error identified in the current year that relates to the previous year’s audited financial statements.
|Prior period errors||By council type (2020 only)|
|Year ended 30 June||2019||2020||Metro||Regional||Rural||County||JO|
|Less than $250,000||2||2||‑‑||2||‑‑||‑‑||‑‑|
|$250,000 to $500,000||2||4||1||2||1||‑‑||‑‑|
|$500,000 to $1 million||9||1||‑‑||1||‑‑||‑‑||‑‑|
|$1 million to $5 million||13||18||4||9||5||‑‑||‑‑|
|$5 million to $15 million||16||21||8||6||7||‑‑||‑‑|
|$15 million to $30 million||7||9||3||5||1||‑‑||‑‑|
|$30 million to $50 million||3||1||‑‑||1||‑‑||‑‑||‑‑|
|$50 million and greater||7||5||4||1||‑‑||‑‑||‑‑|
|Total number of errors||59||61||20||27||14||‑‑||‑‑|
|Total value of errors ($ million)||1,272||813||424||286||103||‑‑||‑‑|
In addition to the monetary prior period errors, a disclosure prior period error was reported in Central Coast Council's financial statements.
Of the 61 prior period errors, six were greater than $30.0 million. All these errors were asset related.
|Council||Description of prior period error|
|Blacktown City Council||Council's revaluation of stormwater drainage, roads, footpaths and other road assets was understated by $98.3 million as council owned assets were identified but not previously recognised in the financial statements, impacting the prior period.|
|Byron Shire Council||Council's revaluation of roads, bridges, footpaths, earthworks and stormwater drainage was understated by $36.1 million as council owned assets were identified but not previously recognised in the financial statements, impacting the prior period.
Council overstated operational land by $9.1 million, as the land parcel was incorrectly split between operational and community land from the 2016 valuation, impacting the prior period.
|Canterbury-Bankstown Council||The following errors impacting the prior period were identified from council's revaluation of land:
This resulted in a net decrease to land assets of $60.4 million.
|City of Parramatta Council||The following errors impacting the prior period were identified from council's revaluation of stormwater drainage assets:
This resulted in a net increase in stormwater drainage assets of $86.8 million. The error dated back to the council amalgamation.
Council's comprehensive revaluation of operational land was overstated by $15.4 million as land assets were recorded but not owned by council.
|Dubbo Regional Council||Council's revaluation of stormwater drainage assets was overstated by $75.1 million due to incorrect rates applied upon amalgamation of the former councils, inconsistent depreciation methodology and inconsistent condition assessments, impacting the prior period.
Council's revaluation of airport runways was understated by $16.8 million due to the identification of bulk earthworks that should have been recognised previously, impacting the prior period.
|Wollondilly Shire Council||Council’s revaluation of roads, bridges, footpaths, earthworks, carparks and stormwater drainage performed in 2015 was understated by $56.0 million due to:
There were no prior period errors identified at county councils and joint organisations.
The common areas where prior period errors were identified are outlined below. Ninety per cent of the total prior period errors were asset related.
|Common prior period errors||Number of councils|
|Quality of asset records, such as:
|Asset revaluation errors, such as:
2.2 Timeliness of financial reporting
The Local Government Act 1993 requires councils to submit their audited financial reports to OLG by the statutory deadline of 31 October or apply for an extension. Natural disasters, COVID-19 pandemic and other factors impacted the 2019–20 reporting timetable. OLG extended the statutory deadline for councils and joint organisations to lodge their audited financial statements by an additional month to 30 November 2020.
Eighty-nine per cent of councils lodged their audited financial statements by the amended statutory deadline
One hundred and thirty-three councils and joint organisations lodged their audited financial statements by the amended statutory deadline. Canberra Region Joint Organisation did not submit their audited financial statements by the statutory deadline and did not apply for extension before the deadline lapsed. This matter was reported to the Minister for Local Government.
Sixteen councils and joint organisations (2019: 30) applied for an extension to lodge their financial statements which were met by them. The reasons why councils required extensions are summarised below.
|Council or joint organisation||Reason for seeking extension|
|Armidale Regional Council||Additional time was required to:
|Balranald Shire Council||In January 2020, the Minister for Local Government suspended the council following a public inquiry due to:
Council's finance team were unable to find a suitable replacement for the Finance Manager role vacated in March 2020.
|Berrigan Shire Council||Council indicated that key staff were severely impacted by the COVID-19 border restrictions.|
|Central Coast Council||In October 2020, the Minister for Local Government suspended the council due to:
|Central Darling Shire Council||Council's IT servers experienced a three-week outage.|
|Cootamundra-Gundagai Regional Council||Additional time was required to:
|Dungog Shire Council||Key finance staff went on unplanned leave.|
|Hilltops Council||Council continues to face on going issues and complexities associated with the 2016 merger. This includes implementation of a single IT system from three former council systems into one.
The delay in preparation of council’s 2018–19 financial statements meant the audit opinion was provided on 1 May 2020.
|Illawarra Shoalhaven Joint Organisation||Delay in financial services transition from a member council. New finance team did not have the capacity to complete the financial statements on time.|
|Lithgow City Council||Delays in resolving financial statement disclosures.|
|Orana Joint Organisation||Timing of council meeting delayed due to mayor's unavailability.|
|Parkes Shire Council||Resolving accounting issues and providing evidence to support the financial statements.|
|The Council of the Municipality of Kiama||Additional time was required due to:
|Walcha Council||Departure of key finance staff member and finance staff member going on extended leave.|
|Wollondilly Shire Council||Councils' review of asset valuations performed in 2015 identified material errors in the valuations.|
|Yass Valley Council||Delays in resolving financial data inconsistencies produced from a newly implemented IT system.|
More councils performed early financial reporting procedures
Early close procedures allow financial reporting issues and risks to be addressed by management and audit early in the financial statement close process. This helps to improve the quality and timeliness of financial reporting.
This year, 76 per cent (2018–19: 62 per cent) of councils performed early financial reporting procedures, including:
- completing infrastructure, property, plant and equipment valuations before 30 June
- performing fair value assessment of infrastructure, property, plant and equipment
- preparing proforma financial statements and associated disclosures
- assessing the impact of material, complex and one-off significant transactions
- explaining all unresolved prior year audit issues, with a proposed action plan to resolve them
- assessing the impact of new accounting standards.
2.3 Implementation of new accounting standards
Councils and joint organisations implemented three new accounting standards for the first time in their 2019–20 financial statements. These impacted the financial position and operating results of councils.
AASB 16 ‘Leases’ changed how councils and joint organisations treat operating leases in 2019–20
AASB 16 became effective for all councils and joint organisations from 1 July 2019.
Collectively, the implementation of AASB 16 increased councils’ and joint organisations' assets by $187.2 million and liabilities by $189.4 million. This is because leases relating to operating activities were recognised in the financial statements for the first time. Common examples include building leases, waste management agreements, maintenance agreements, motor vehicles and photocopiers. Councils also recognised a liability for the current value of all lease payments.
AASB 16 ‘Leases’ changed how lessees treat operating leases for financial reporting. Under AASB 16, operating leases are now recorded, with a few exceptions, in an entity's Statement of Financial Position through the recognition of a right-of-use asset and a corresponding lease liability. It also changes the timing and pattern of expenses recorded in the Statement of Comprehensive Income by recognising deprecation on the asset and the financing cost of the lease.
AASB 16 requires different and more extensive disclosures about an entity’s leasing activities. The objective of the disclosures is to provide users of financial statements with a basis to assess the effect of leasing activities on an entity’s financial position, performance and cash flows.
AASB 15 ‘Revenue from Contracts with Customers’ and AASB 1058 ‘Income of Not-for-Profit Entities’ changed how councils and joint organisations report income in 2019–20
AASB 15 and AASB 1058 became effective for councils and joint organisations from 1 July 2019.
Councils and joint organisations recorded the impact from the initial adoption of the new revenue standards, which in total amounted to a $388.1 million adjustment to the opening retained earnings.
AASB 15 and AASB 1058 required councils and joint organisations to reassess the way they accounted for revenue, depending on whether it arises from contracts for sales of goods and services, grants and other contributions. Revenue from contracts for services is now recognised only when performance obligations have been satisfied.
The adoption of the new standards meant that councils and joint organisations reviewed their revenue contracts and adjusted how they had previously been accounted for. Councils and joint organisations were not required to restate their prior period figures. The cumulative effect of applying the standards on prior periods is presented as an adjustment to opening retained earnings at 1 July 2019.
In focus: response to recent emergency events
Recent emergency events, including drought, bushfires, floods and the COVID-19 pandemic have impacted councils.
This chapter will provide insights into how these events have impacted councils, including:
- financial implications of the emergency events
- changes to councils' operating models, processes and controls
- accessibility to technology and the maturity of councils' systems and controls to prevent unauthorised and fraudulent access to data
- receipt and delivery of stimulus packages or programs at short notice.
Recent emergency events significantly impacted councils
Recent emergencies, including drought, bushfires, floods and the COVID-19 pandemic have brought particular challenges for councils and their communities.
At the end of June 2019, the NSW Department of Primary Industries' Combined Drought Indicator showed that 97.6 per cent of New South Wales was in one of the three drought categories, 'intense drought', 'drought' and 'drought affected intensifying or weakening'. Intense drought conditions persisted in parts of western, south-east and northern New South Wales.
The dry vegetation and soil, combined with intense heat during the summer resulted in one of the worst bushfire seasons that New South Wales has ever experienced, with 55,230 square kilometres of land burnt, 11,566 structures damaged or destroyed, and 26 lives lost. This was followed by storms and torrential rain falling in parts of New South Wales, causing widespread flooding.
Local councils were included in 171 natural disaster declarations in 2019–20 (94 in 2018–19). Natural disasters are declared for events such as bushfires, floods or storms that cause significant damage or loss of life, where eligible state expenditure exceeds $240,000.
Local Government areas impacted by bushfire, floods and storm declarations
|Year ended 30 June||2018||2019||2020|
|LGA included in bushfire declarations||36||29||57|
|LGA included in flood and storm declarations||18||65||114|
|Total LGA included in natural disaster declarations||54||94||171|
Declaration of bushfires, floods and storms enable councils to apply to recover costs associated with these disasters from Resilience NSW (the NSW Department of Communities and Justice prior to 1 May 2020), via administering agencies including Public Works Advisory and Transport for NSW. Resilience NSW now administers the NSW Disaster Assistance Arrangements.
The map below shows that 96 councils were impacted by bushfires and storms in 2019–20. Thirty-five councils were impacted by both bushfires and storms, with many of these councils in the North Coast and South East regions. Metropolitan councils were more impacted by floods and storms, while regional and rural councils were more impacted by bushfires.
Following the natural disasters, the COVID-19 pandemic brought unprecedented challenges, impacting all councils. Infection control measures required by State Government Orders in response to COVID-19 disrupted the traditional means that councils use to deliver services to the community. Councils had to adapt to the new environment and make changes to how they operate as services were disrupted and facilities were closed.
3.1 Financial implications
The financial implications arising from the emergency events varied greatly across councils. We reviewed the impact on council operating results compared to original operating budgets1, with consideration of both the revenue and expenditure impacts.
The operating result for 56 per cent of metropolitan councils exceeded the original budget
Despite the recent emergency events, 56 per cent of metropolitan councils reported an operating result that was favourable compared with their operating budget set in May 2019.
For revenue, 91 per cent of metropolitan councils reported decreases in user charges and fees. This was due to councils cancelling public events, programs and closing revenue generating facilities and services during the lockdowns, including community halls, swimming pools, sports grounds, theatres, galleries, museums and other service centres.
This was offset by an increase in grants and contributions compared with budget for 68 per cent of councils, mainly due to:
- state and federal government stimulus packages and funding opportunities provided to councils in response to the emergency events
- some councils received more developer contributions than anticipated due to a higher volume of development activity occurring. The NSW Government offered incentives to encourage more homes to be built or to be substantially renovated to protect the construction sector during the pandemic.
For expenditure, 62 per cent of councils reported a decrease in employee costs and 74 per cent of councils reported a decrease in other expenses compared with budget. This was due to:
- a reduction in casual workers and contractors as services were suspended or delivered at a much-reduced capacity due to the restrictions
- a freeze on recruitment at some councils; vacant positions were put on hold and staff were redeployed to different areas of council
- reduction in costs for maintaining parks and other recreational facilities
- reduction in travel expenses for employees
- supply chain disruption as materials and products were more difficult to source.
This was offset by additional expenditure required for cleaning, upgrading facilities to be COVID-safe and IT equipment to enable staff to work from home.
Examples of the more significant impacts of the recent emergency events on individual metropolitan councils follow:
|Council||Impact of emergency events|
|Council of the City of Sydney||Council provided rental relief to a large number of tenants in commercial properties who had suffered financial hardship due to the impacts of COVID‑19 and applied for relief under the Federal Government Code of Conduct for commercial tenancies. This was largely responsible for a reduction in rental income of $10.8 million or 14 per cent compared to the budget of $66.9 million.|
|Blue Mountains City Council||User fees and charges were $6.7 million less than the budget of $21.0 million due to closure of council facilities.|
|Waverley Council||Council provided COVID‑19 relief packages, including waiving various charges, rent reductions and a 'buy local' publicity campaign to encourage people to support local businesses during the downturn. This contributed to a $4.7 million or 13 per cent reduction in income from user fees and charges. This impact was offset by the receipt of additional capital grants and contributions which were $8.4 million or 66 per cent higher than budget.|
|Inner West Council||Due to the impact of COVID‑19, council closed its aquatic centre and received less revenue from childcare. It also received less section 94 fees, parking fines and other fees. User fees and charges were $32.7 million compared to the budget of $46.0 million. However, this was partially offset by grants for childcare from the government. Council’s operating grants and contributions were $17.0 million compared to a budget of $10.6 million.|
|Northern Beaches Council||Council was impacted by COVID‑19 and storms. The damage from the storms were estimated by council to cost $3.8 million and consisted of damage to seawalls, retaining walls and buildings including the Civic Centre.|
|Council received $74.5 million in user charges and fees income compared to a budget of $84.0 million mainly due to the impact of COVID‑19. Childcare revenue was significantly lower during the fee free period. However, council received additional grants to offset the fee free period from the government.|
Fifty-four per cent of regional councils had an operating result that fell short of their original budget
Fifty-four per cent of regional councils reported an operating result that fell short of their original budget set in May 2019.
Regional councils were more impacted by bushfires than metropolitan councils. Regional councils also reported that certain revenue and expenditure items were directly impacted by the COVID-19 pandemic. Sixty-two per cent of regional councils reported a reduction in user fees and charges. While the services and facilities impacted were largely similar to metropolitan councils, regional councils with airports reported losses due to the disruption in airport operations, including a reduction in passengers and limited flight routes operating. Other decreases include a reduction in tourism related income, such as caravan parks, holiday parks and information centres.
This was offset by increases in grants and contributions as the Federal and State Governments provided a range of relief and funding opportunities. Seventy per cent of regional councils reported higher grants and contributions compared with budget.
Fifty-nine per cent of regional councils reported a reduction in other expenses as councils saved money on utility costs, such as electricity and water, due to operations being scaled back. Councils also saved money on costs due to projects being delayed as a result of the pandemic and supply chain issues.
Examples of the more significant impacts of the emergency events on individual regional councils follow:
|Council||Impact of emergency events|
|Bega Valley Shire Council||Council was impacted by numerous bushfire and flood natural disaster declarations.
Council used an external expert to estimate the costs of restoring the damage done by these emergency events to be $20.5 million for the damage caused by the bushfires and $8.0 million for the flooding events in February, July and August 2020.
|Clarence Valley Council||Council was impacted by the bushfires and floods, with a total estimated cost of $19.0 million.
Council had higher than budgeted operating grants and contributions of $33.0 million compared to a budget of $25.0 million. This was due to additional flood and storm damage grants of $7.0 million and bushfire related grants of $5.2 million.
Council’s material and contractor expenses was $11.0 million higher than the budget of $31.0 million, which is attributed to the response to the natural disasters.
|Eurobodalla Shire Council||Council was impacted by the bushfires, with 79 per cent of the Local Government area directly impacted by the fires. Council lost 14 bridges, estimated to cost $10.0 million to replace. Council reported it had already received $6.8 million in additional funding and has made insurance claims.|
|Coffs Harbour City Council||The emergency events impacted airport operations, contributing to a decrease in income of $1.9 million. Council also runs holiday parks which were impacted by the emergency events. This contributed to income decreasing by $3.9 million. Council had to subsidise the airport and the holiday parks.|
|Albury City Council||Council was impacted by COVID-19 as it is on the border with Victoria where NSW Police implemented tight state border controls for various periods during the pandemic. The airport, run by the council, reported a loss of $1.0 million, which had to be subsidised by council.|
Fifty-four per cent of rural councils had an operating result that fell short of their original budget
Fifty-four per cent of rural councils reported an operating result that fell short of their original budget set in May 2019.
Ninety-eight per cent of rural councils were impacted by one or more natural disasters. The higher costs of responding to bushfires, droughts and storms were offset by increases to grants and contributions for operating purposes. The Federal and State Governments offered assistance to councils impacted by the recent emergencies, along with a range of funding opportunities, which contributed to grants and contributions.
Rural councils' ability to collect user charges was impacted to a lesser degree compared with the metropolitan and regional councils. User charges and fees was less than budgeted for 40 per cent of councils. Seventy per cent of councils reported an increase in other expenses compared with budget to respond to natural disaster events.
Examples of the more significant impacts of emergency events on individual rural councils follow:
|Council||Impact of emergency events|
|Glen Innes Severn Council||Council was impacted by bushfires and floods, with an estimated cost of damage of $2.8 million. A bridge was destroyed in the fires, roads were damaged and a council building damaged. Council received $1.3 million from the federal government through the Bushfire Community Resilience and Economic Recovery Fund. Council used the grant to fund initiatives to assist the community and businesses to recover from the bushfires.|
|Kyogle Council||Council was impacted by bushfires and floods. Council estimated the cost of damage to be $3.5 million, due to a bridge and a culvert being damaged.|
|Tenterfield Shire Council||Council recognised $1.4 million in impairment to infrastructure assets due to natural disasters that occurred during the year. Council received operating grants of $14.3 million compared to a budget of $8.7 million mainly due to grants for bushfires and storm damage repairs.|
|Narrabri Shire Council||Council experienced drought and flooding, with the town’s water supply being contaminated by floodwaters. Council estimated the cost of the flood event to be $0.9 million. Income from council's theatre was down approximately $0.3 million due to the impact of COVID‑19. This impact was offset by an additional $0.78 million in grant funding for drought relief and economic stimulus.|
|Dungog Shire Council||Council experienced heavy storms in January 2020 and estimated the damaged caused by the storm to be $1.2 million.|
3.2 Controls and governance
Councils adapted their systems, policies and procedures to accommodate remote working environments. We considered how this affected the existing control environment and the mitigating controls established by councils to respond to these events.
Councils changed governance, policies, systems and processes to respond to the recent emergency events
Councils developed or changed their governance, policies, systems and processes to respond to the recent emergency events. Some of the actions taken by councils are summarised below.
Councils experienced challenges adapting IT infrastructure and controls to enable staff to work from home
Many councils applied working from home arrangements during the COVID-19 lockdowns. Having a number of remotely connected employees for an extended period may strain council's IT infrastructure and control environment. It is important to ensure network connections and controls are secure to mitigate the data protection risk associated with communicating through mobile applications.
This new way of working resulted in some challenges during implementation and the impacts are described below.
3.4 Fraud and corruption risks
Past experience suggests that during economic downturns, the level of misconduct and corrupt conduct can increase. Recent emergency events have increased fraud and corruption risk as:
- there is less supervision and monitoring of staff in a working from home arrangement
- the effectiveness of controls may be compromised due to remote working
- the theft of assets is easier due to physical absence of employees in the workplace
- stimulus funding is delivered in a compressed timeframe
- it may be easier for employees to rationalise dishonest behaviour.
Twenty-two per cent of councils engaged in emergency procurement during the recent emergencies
In times of emergencies, there may be a need to engage in emergency procurement, using direct negotiations and other exemptions from the competitive procurement process to pay suppliers quickly, agree to contract variations and rely on staff to purchase items using purchasing cards. There is a risk that emergency procurement may not be processed appropriately.
Twenty-two per cent of councils engaged in emergency procurement during the recent emergencies. Of this, 15 per cent reported that the procurement could be better documented but was considered a lower risk as the goods or services being procured were not significant.
3.5 Business continuity and disaster recovery planning
Business continuity and disaster recovery planning assists organisations to prepare for and ensure they can respond to an incident or crisis. This includes natural disasters and pandemic events like COVID-19. Ideally, business continuity plans would ensure organisations are prepared to respond effectively to the impact of incidents or crises on a wide range of areas including service delivery, safety and availability of staff, availability of IT and other systems, financial management and governance.
Business continuity and disaster recovery plans need to be updated for recent emergency events
The recent emergency situations have highlighted the need for councils to have an updated business continuity and disaster recovery plans to capture lessons learned. Sixty-five per cent of councils updated their business continuity plan (BCP) and 42 per cent of councils updated their disaster recovery plan (DRP) to document how they would respond to a pandemic event. If these plans are not updated, councils may not adequately capture the lessons learned, and will not continuously improve the suitability, adequacy and effectiveness of business continuity and disaster recovery arrangements. While not all councils have updated their BCP and DRP, 80 per cent of councils have reviewed their system backup policy and practices.
The Audit Office is planning to undertake a performance audit over business continuity planning in 2021. This audit will examine the effectiveness of business continuity planning processes at a selection of local councils in preparing for emergency events.
3.6 Stimulus funding, programs and support for the community
Councils received funding from various sources for natural disasters
The government offered various forms of assistance to councils impacted by natural disasters. This included disaster relief funding and opportunities to apply for grants ranging from small projects to large infrastructure opportunities.
Resilience NSW administers the NSW Natural Disaster Assistance Arrangements through administering agencies including Public Works Advisory and Transport for NSW. Councils can apply for assistance to restore essential public assets damaged as a result of a natural disaster. In 2019–20, administering agencies reported total eligible expenditure of approximately $81.7 million to Resilience NSW, for the restoration of Local Government essential public assets under the NSW Natural Disaster Assistance Arrangements. This amount represents the expenditure incurred and reported by councils to the administering agencies, and not total payments to the councils by the NSW Government.
The Commonwealth Government committed $123 million under the Drought Communities Program to support 123 drought affected councils to invest in local community infrastructure, boosting local employment, addressing social and community needs and other projects such as emergency water supply.
There was also a NSW Drought Relief Heavy Vehicle Access Program where $15.0 million of funds were allocated to improve local roads and communities through difficult drought conditions.
The Department of Regional NSW administered the Bushfire Community Resilience and Economic Recovery Fund (Phase 1) where $7.6 million was provided to 49 bushfire affected local councils for immediate, locally led community and economic recovery activities. Phase 2 was administered by Resilience NSW, and the program was renamed to the Bushfire Community Recovery and Resilience Fund. Twenty-seven councils received $250,000 grants and five councils received $100,000 grants, with the total funding provided being $7.3 million. These funds were used by councils to manage projects that support community recovery and help build resilience.
The NSW Rural Fire Service also provided funding to councils under the bushfire risk mitigation and resilience program. This funding was available to assist councils to perform bushfire mitigation works, provide access for firefighting and to deliver projects that increase the resilience of New South Wales communities to bushfires. In 2019–20, two councils received funding through this program to the value of $388,000.
The State Government provided floodplain management grants to support Local Government to manage flood risk. The funding comes from two programs:
- NSW floodplain management program (funded by the NSW Department of Planning, Industry and Environment (DPIE))
- Floodplain grants scheme (funded by Resilience NSW).
In 2019–20, total funding of $7.3 million was provided to 43 councils under the NSW floodplain management program and $1.9 million was provided to four councils under the floodplain grants scheme.
Over half a billion dollars of stimulus funding was committed to councils to manage the impacts of COVID-19
To respond to the COVID-19 pandemic, the State Government announced a $395 million Local Government economic stimulus package to safeguard jobs, services and infrastructure delivery.
The economic stimulus package included $112.5 million job retention allowance, aimed at safeguarding jobs in the Local Government sector. Council employees were not eligible for the Commonwealth Government's Job Keeper payment. Eligible councils received $1,500 per fortnight per employee for up to three months. Five councils received $250,000 relating to the 2019–20 period. The program is still active and payments will continue to be made to eligible councils in the future.
The government also provided $32.8 million to fully fund the increase in the emergency services levy in 2020–21 for all councils.
There was a further $250 million increase to the NSW Treasury Corporation (TCorp) Local Government lending facility to make it easier for councils to access low interest loans to fund infrastructure. Three councils took out NSW Government TCorp loans worth $25.5 million from this scheme. Councils were also able to obtain a NSW Government guarantee for commercial borrowings, subject to certain criteria being met.
On top of the $395 million economic stimulus package, councils were provided with further relief and a range of funding opportunities. Some examples include:
- $82.0 million to keep council operated childcare and family day care services running during the pandemic
- $36.0 million to rebuild and refurbish infrastructure for up to 171 local showgrounds
- $15.0 million to fund projects to benefit communities during COVID-19 by providing more space for the public to safely walk, cycle and exercise
- $15.0 million to boost high street economic recovery, increase footfall and improve safety
- $10.0 million to enhance ePlanning for councils, so that the community can lodge their development applications online
- COVID-19 Aged Care Workforce Retention Bonus Payment for residential and home care workers.
In 2020–21 Budget, the Commonwealth Government announced a new $500 million Local Roads and Community Infrastructure Program to support councils to deliver priority local road and community infrastructure projects across Australia, supporting jobs and the resilience of local economies to help communities bounce back from the COVID-19 pandemic.
Councils supported their communities through the recent emergencies
The recent emergency events challenged local communities. Councils responded by providing support in different ways. Some examples include:
- helping local businesses, community groups and residents take simple steps to prepare for natural disasters through the 'Get Ready Local Councils' communications package
- providing emergency funding and grants to local communities to recover from the recent emergencies
- providing rental relief on commercial premises to support local businesses affected by the COVID-19 restrictions
- allowing ratepayers experiencing financial hardship to defer rate payments
- waiving or reducing fees for outdoor dining permit fees and food premise inspections and footpath usage for COVID-19 impacted businesses
- working with local businesses to be COVID-safe.
Key audit findings
A strong system of internal controls enables councils to operate effectively and efficiently, produce reliable financial reports, comply with laws and regulations and support ethical government.
This chapter outlines the overall trends in governance and internal control findings across councils, county councils and joint organisations in 2019–20. It also includes the findings reported in the 2018–19 audits of Hilltops, MidCoast and Murrumbidgee councils as these audits were finalised after the Report on Local Government 2019 was published.
Financial audits focus on key governance matters and internal controls supporting the preparation of councils' financial statements. Audit findings are reported to management and those charged with governance through audit management letters.
Total number of findings reported in audit management letters decreased
In 2019–20, 1,435 findings were reported in audit management letters (2018–19: 1,985 findings). An extreme risk finding was also identified this year related to Central Coast Council's use of restricted funds. The total number of high-risk findings decreased to 53 (2018–19: 82 high-risk findings).
Findings are classified as new, repeat or ongoing findings, based on:
- new findings were first reported in 2019–20 audits
- repeat findings were first reported in prior year audits, but remain unresolved in 2019–20
- ongoing findings were first reported in prior year audits, but the action due dates to address the findings are after 2019–20.
Findings are categorised as governance, financial reporting, financial accounting, asset management, purchases and payables, payroll, cash and banking, revenue and receivables, or information technology. The high-risk and common findings across these areas are explored further in this chapter.
Governance is the framework of rules, processes and systems that enables organisations to achieve goals and comply with legal requirements. Good governance promotes public confidence and satisfaction in councils' operations. Key governance areas include appropriate accountability mechanisms, operational and financial risk management and fraud prevention.
Governance findings decreased from 299 to 239
Audit management letters reported 239 findings relating to governance (2018–19: 299 findings). Fifty per cent were repeat or partial repeat findings.
Extreme risk finding
One extreme risk finding was reported at Central Coast Council. Further analysis on this finding is detailed in Chapter 2.1 'Quality of financial reporting'.
|Central Coast Council (partial repeat finding)||Council spent restricted funds for unrestricted purposes during 2019–20, without the appropriate approvals under the Local Government Act 1993. This indicated the council's oversight of its current and forecast cash flow situation was not always effective. Council used a monthly 'Investment Report' to understand its historical cash and investment position compared to restricted funds. However, these reports did not include forecasts of expected cash and investment positions compared to restricted funds, impacting effectiveness of cash flow management.|
High-risk findings, including repeat findings, were reported at the following councils. Three of the 2018–19 high-risk findings were not resolved, including one finding elevated to extreme risk.
|Council||Description of corrected error|
|Bellingen Shire Council (repeat finding)||Council did not comply with the Environment Protection Authority’s requirements for quarry operations, and workplace health and safety legislation.|
|Central Coast Council (new finding)||Council did not have a policy document or framework setting out legislative and operational requirements for each category of externally restricted funds. Council was unable to provide the basis for some externally restricted funds.|
|Liverpool City Council (new finding)||Council decided to proceed with the Liverpool Civic Place development, with an estimated cost of $195 million. Recommendations were made for council to perform a comprehensive assessment over the contract to ensure accounting implications are appropriately considered, and to update the projected cashflows for major events that impact cashflow assumptions.|
|Mid-Western Regional Council (repeat finding)||Council did not fully comply with its obligations under the Unclaimed Money Act 1995. $178,000 held by council for more than six years should be assessed for remittance to Revenue NSW.|
|Murrumbidgee Council (repeat finding)||Council did not periodically review suppliers where the cumulative annual expenditure exceeded $150,000. Council should consider whether these goods and services would be more efficiently procured under a contract.
Council's contract register was not complete and accurate. Key information was not in the register, including council's contract manager and supplier contact details.
The common governance findings reported in audit management letters related to deficiencies in fraud controls, legislative compliance and corporate governance policies.
Deficiencies in fraud control processes at 41 councils
The following fraud control deficiencies were reported in audit management letters.
|Fraud control deficiencies||Number of councils|
|Council did not have a fraud and corruption prevention policy, or it was outdated||30|
|Council did not perform a fraud risk assessment
|Council did not require staff to provide annual attestations to the Code of Conduct||20|
|Council did not provide fraud awareness training to staff||15|
Effective fraud controls and ethical frameworks help protect councils from events that risk serious reputational damage and financial loss.
Lack of legislative compliance policies or register at 38 councils
Thirty-eight councils did not have a sufficient legislative compliance policy or register. Legislative compliance frameworks assist councils to monitor compliance with key laws and regulations. This is important as councils provide a broad range of services to the community and are subject to many legal requirements. A legislative breach can attract penalties, impact service delivery and cause significant reputational damage.
Other key corporate governance policies were not in place or regularly updated at 61 councils
The common areas where councils were missing governance policies are summarised below.
|Area of corporate governance with absent or outdated policies||Number of councils|
|Public interest disclosures||12|
|Gifts and benefits||6|
Corporate governance policies are essential for ensuring councils operate in accordance with external and internal requirements. It is important that the rules, standards and expectations are clearly outlined, and staff are provided adequate guidance to inform their actions.
Governance and internal controls over local infrastructure contributions could be improved
The Audit Office's recent performance audit 'Governance and internal controls over local infrastructure' assessed the effectiveness of governance and internal controls over local infrastructure contributions (developer contributions) collected by four councils during the 2017–18 and 2018–19 financial years.
The audit identified that Blacktown City Council and City of Sydney Council provided effective governance over their developer contributions whereas Central Coast and Liverpool City councils’ governance arrangements required improvement. Central Coast Council also breached the Environmental Planning and Assessment Act 1979 between 2001 and 2019 when it used developer contributions for administration costs. These funds were repaid in late 2019.
4.2 Financial reporting
Financial reporting is an important element of good governance. Confidence in and transparency of public sector decision making is enhanced when financial reporting is accurate and timely.
Financial reporting findings decreased from 137 to 103
Audit management letters reported 103 findings relating to financial reporting (2018–19: 137 findings). Thirty-nine per cent were repeat or partial repeat findings.
High-risk findings, including repeat findings, were reported at the following councils. Four of the 2018–19 high-risk findings were not resolved, and four findings were reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks.
|Berrigan Shire Council (repeat finding)||Due to the impact of border restrictions on key finance staff, the financial statements submitted for audit were incomplete. A number of errors and disclosure deficiencies were identified and corrected. Key documents to support infrastructure, property, plant and equipment balance were provided late.|
Bland Shire Council (new finding)
|Due to resourcing issues in the finance team, the financial statements submitted for audit were incomplete. A number of errors and disclosure deficiencies were identified and corrected. Some key documents including accounting position papers and reconciliations for key account balances were provided late.|
Central Coast Council (repeat finding)
|Council submitted the financial statements for the audit on 13 November 2020, one month after the initially agreed date. The financial statements included significant presentation issues, material misstatements and disclosure deficiencies. There was no documented evidence of timely quality review of the financial statements and associated supporting workpapers.|
|The Council of the Municipality of Kiama (new finding)||Council was significantly delayed in providing documentation for the interim audit due to resourcing issues, migration of financial information to the new accounting system and the impact of COVID‑19 on council operations.|
|Mid‑Western Regional Council (new finding)||Council submitted the accounting position paper for the impact assessment of the new accounting standards AASB 15 and AASB 1058 late. The failure to provide the assessment in a timely manner increases the risk that critical deadlines may not be met.|
|Murray River Council (repeat finding)||Council continues to experience issues in the financial statement preparation process and audit readiness. This has resulted in:
Murrumbidgee Council (repeat finding)
Council submitted draft financial statements for audit on 22 October 2020, one week after the scheduled due date. Council engaged an external contractor to assist with the preparation of the financial statements, but the financial statements required further updates after submission. Key documents including the accounting position paper on new accounting standards were not ready by agreed audit dates.
Hilltops Council (repeat finding)
|Council submitted draft financial statements for audit on 4 February 2020, three months after the statutory reporting deadline of 31 October 2019. The financial statements submitted for audit were based on draft financial information, were incomplete, and contained numerous errors and disclosure deficiencies. This included insufficient disclosures for new accounting standards and interpretations issued but not yet effective.|
MidCoast Council (new finding)
|Council submitted draft financial statements for audit on 16 October 2019, one month after the scheduled audit start date. Council advised the delay was due to:
Murrumbidgee Council (repeat finding)
Council submitted draft financial statements for audit late. The audit was scheduled to start on 30 September 2019, but it was rescheduled several times as council was not prepared. Council advised the delay was due to inadequate resourcing in the finance team and migration of financial information to the new accounting system. This is a repeat finding first raised in the 2016–17 audit.
One staff member was responsible for the financial statement close process and audit preparation. This resulted in significant delays to the audit, and there is a key‑person risk.
Common findings across councils include:
- 47 councils did not appropriately apply or adequately assess the impact of the new accounting standards
- lack of preparation for the audit, such as having a financial reporting plan, impacted the timeliness of financial reporting at 22 councils
- financial statements submitted for audit for 21 councils contained numerous errors and disclosure deficiencies
- 14 councils did not have sufficient processes to ensure related party transactions were appropriately disclosed in the financial statements in line with AASB 124 'Related Party Disclosures'. A related party transaction involves the council and another party with a pre-existing relationship with the council.
Further analysis and insights on financial reporting findings are detailed in Chapter 2 'Audit results'
4.3 Financial accounting
Financial accounting is the processes adopted by management to record and review financial information across the business. Councils use a combination of manual and automated processes and digital information systems to process financial information. Effective processes support the accuracy and completeness of information presented in the financial statements.
Financial accounting findings increased from 108 to 115
Audit management letters reported 115 findings relating to financial accounting (2018–19: 108 findings). Fifty-three per cent were repeat or partial repeat findings.
High-risk findings, including repeat findings, were reported at the following councils. Two of the 2018–19 high-risk findings were not resolved, and three findings were reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks.
|Central Coast Council (new finding)||Some monthly account reconciliations were not prepared and reviewed on a timely basis. Supporting documentation was not consistently attached to explain reconciling items, and some reconciling items were not explained.
Council maintains several information systems for processing revenue transactions. Each day, the sub-ledger systems interface with the general ledger to transfer and update revenue data. Findings identified:
|Central Darling Shire Council (two repeat findings)||
Two high-risk findings were reported:
|MidCoast Council (new finding)||Council’s records management practices relating to information to support balances and disclosures in the 2019 financial statements were not sufficiently embedded to enable the timely preparation of the financial statements.|
The common financial accounting findings reported in audit management letters related to deficiencies in key account reconciliations and processing of manual journal adjustments.
Key account reconciliations were not prepared in a timely manner or independently reviewed at 55 councils
Regular reconciliation of financial information ensures timely identification of errors, and also facilitates a more efficient audit process. It was reported in audit management letters that:
- 36 councils did not reconcile all key balances in the financial statements in a timely manner
- there was no evidence of independent review of key account reconciliations at 33 councils.
Lack of segregation of duties with manual journal adjustments at 28 councils
There was a lack of segregation of duties over the posting of manual journal adjustments to financial information at 28 councils. An independent review of manual journal adjustments is important to reduce the risk of fraud or error in the financial statements.
4.4 Asset management
Councils own and manage large infrastructure asset portfolios to support the delivery of community services. Asset management involves operational aspects such as maintenance and physical security, as well as accounting procedures such as valuing assets in accordance with accounting standards.
Asset management findings decreased from 307 to 304
Audit management letters reported 304 findings relating to asset management (2018–19: 307 findings). Forty per cent were repeat or partial repeat findings.
High-risk findings, including repeat and ongoing findings, were reported at the following councils. Five of the 2018–19 high-risk findings were not resolved, and four findings were reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks. There was an increase in the number of high-risk findings reported this year in asset management.
|Bellingen Shire Council (new finding)||Council identified road and bulk earthwork assets not previously recorded in the financial statements, resulting in prior period errors in:
Council's fixed assets register (FAR) is not sufficiently secured from unauthorised changes as it is maintained in excel spreadsheet. The FAR did not include key information fields such as acquisition date.
|Berrigan Shire Council (repeat finding)||
|Byron Shire Council (new finding)||
|Central Coast Council (two new findings)||Two high-risk findings were reported:
|Dubbo Regional Council (partial repeat finding)||The asset revaluation process identified prior period errors due to:
|Gilgandra Shire Council (new finding)||Council’s revaluation process over roads, bridges and footpaths identified errors due to differences in the recorded length of the road network, amounting to $11.8 million.
Asset valuation reports were not available until late during the final audit.
|Inner West Council (ongoing finding)||In 2018–19, council did not sufficiently complete a quality review of the asset revaluation process.
In 2019–20, council was not required to perform a comprehensive revaluation for any asset classes, so council could not address the finding during 2019–20. The finding will remain ongoing until the next revaluation is performed.
|Kempsey Shire Council (new finding)||Council identified transport assets with a written down value of $11.6 million not previously recorded in the financial statements, resulting in a prior period error.|
|Lane Cove Municipal Council (new finding)||Council did not have a robust process to review restrictions associated with land holdings in the prior year land revaluation process, resulting in a $9.8 million prior period error.|
|Liverpool City Council (new finding)||Council controlled 61 parcels of community land valued at $104 million that were contaminated but did not account for any impairment in the comprehensive revaluation. The subsequent impairment assessment resulted in an $11.0 million reduction to the fair value of the land.|
|Lockhart Shire Council (new finding)||Council's valuation methodology for roads, bridges, footpaths and bulk earthworks:
|Murray River Council (new and repeat finding)||
|North Sydney Council (new finding)||Council prepared a position paper for the major redevelopment of North Sydney Olympic Pool assets. From the review of the position paper, it was recommended the council apply accelerated depreciation charges to account for the reduction in useful life of the assets, as required by AASB 116 ‘Property, Plant and Equipment’.
Council subsequently applied appropriate depreciation rates for 30 June 2020.
|Orange City Council (repeat finding)||Council’s revaluation process over roads, bridges, footpaths and stormwater assets identified errors with a net impact of $14.8 million, subsequently corrected by council. The errors were due to:
There was a lack of robust quality review of the asset revaluation to confirm the reasonableness of revaluation movements.
|Queanbeyan-Palerang Regional Council (new finding)||Council identified a number of developer contributed assets not previously recorded in the financial statements, resulting in a prior period error of $18.2 million.|
|Strathfield Municipal Council (new finding)||A high-risk finding was reported relating to council's comprehensive revaluation of road infrastructure assets, including:
|Willoughby City Council (new finding)||Council reported a $5.4 million prior period error due to the overstatement of assets. This arose from:
|Wingecarribee Shire Council (new finding)||Council corrected a material misstatement of $117 million arising from the comprehensive revaluation of roads, bridges and footpaths. The error arose primarily due to system limitations in council's asset management system in processing a revaluation of this size and nature.|
|Wollondilly Shire Council (new finding)||Council’s revaluation process over roads, bridges, footpaths, drainage infrastructure, carparks and other infrastructure assets identified errors due to:
|MidCoast Council (new finding)||
The common asset management findings reported in audit management letters related to deficiencies in asset revaluation processes, maintenance of information in asset management systems and landfill rehabilitation accounting practices.
Deficiencies in infrastructure asset revaluation processes at 68 councils
Deficiencies were identified in infrastructure asset valuations at 68 councils, including:
- inadequate documentation to support key assumptions and judgements applied including:
- useful lives and condition assessments
- unit rates used to value infrastructure assets
- incorrect classification of assets
- incorrect exclusion of some assets from valuations
- management not documenting their quality review over the asset valuation.
Weak processes over maintenance and security of fixed asset registers at 68 councils
Maintaining accurate and up to date asset data helps councils to make appropriate decisions around asset management. The common issues reported in audit management letters relating to fixed asset registers are summarised below.
|Fixed asset register issues reported in audit management letters||Number of councils|
Council did not maintain an accurate and complete fixed register. This included:
|Council did not regularly update their fixed asset register for additions and disposals.||41|
|Asset registers were not maintained in a secure format (e.g. use of unlocked spreadsheets or multiple systems).||13|
Improvements to council landfill rehabilitation accounting practices required at 44 councils
Common findings identified in council landfill rehabilitation accounting practices include:
- 12 councils did not formally assess the obligations required to rehabilitate landfill sites
- 11 councils could improve formal documentation of provision calculations to support inputs, assumptions and key data for accounting of the provisions
- 23 councils did not include costs associated with post-closure, aftercare and monitoring of landfill sites in their provisions.
Australian Accounting Standards require a provision for landfill remediation when the obligation to operate landfill sites would result in cash outflows for the council, and it can be reliably measured. Such provisions should be annually reassessed for changes in assumptions, legal requirements and emergence of new landfill remediation techniques.
4.5 Purchases and payables
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.
Purchases and payables findings decreased from 205 to 118
Audit management letters reported 118 findings relating to purchases and payables (2018–19: 205 findings). Forty-five per cent were repeat or partial repeat findings.
High-risk findings were reported at the following councils. Three of the 2018–19 high-risk findings were resolved, and three findings were reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks.
|Gilgandra Shire Council (new finding)||
A senior officer had superuser access to the finance system and was also an authorised signatory for the bank account. The lack of segregation of duties increases the risk of inappropriate transactions.
|Lismore City Council (new finding)||The system-based workflows for approving purchase orders did not match the approved limits in the delegations manual. Some officers had the ability to revise purchase orders to amounts above their delegation without requiring further approval.|
|Mid-Western Regional Council (new finding)||Non-compliance with the Local Government Act 1993 and the Local Government (General) Regulation 2005 for one contract over $250,000 in value for landfill management services. The contract was not subject to a competitive tender in accordance with procurement rules.|
The common purchases and payables findings reported in audit management letters related to controls around purchase orders, review of creditor information and deficiencies in credit card management practices.
Controls around purchase orders were not enforced or absent at 32 councils
At 11 councils, it was identified that employees could approve their own purchase orders. It is important there is segregation of duties in procurement to reduce the risk of fraud and misuse of public money.
Purchase orders were approved after the receipt of goods or services at 25 councils. Purchase orders should be issued before requesting goods or services to reduce the risk of unauthorised transactions.
Insufficient review of changes to creditor information at 32 councils
Thirty councils did not perform sufficient review of changes to creditor information, including bank account details. This increases the risk of transactions paid to incorrect accounts, resulting in financial losses for councils. Councils should review each change or perform regular collective review of changes.
Deficiencies in credit card management practices
The Audit Office's recent performance audit 'Credit card management in Local Government' identified gaps in credit card management practices for all six audited councils, including:
- lack of explicit alignment between credit card limits and financial delegations
- no requirement to check purchases were for valid purposes in the process for reconciling credit card transactions
- card holders sharing credit cards with other employees
- incomplete or inaccurate record keeping.
Procurement processes do not fully support transparent use of public money
In December 2020, the 'Procurement management in Local Government' performance audit assessed the effectiveness of procurement practices in six councils and identified:
- procurement needs were not consistently documented at the planning stage
- staff training on procurement was not adequate
- procurement outcomes were not required to be evaluated
- discrepancies in contract values between contract registers and annual reports.
Effective payroll processes ensure councils manage their workforce in compliance with legislation, employment agreements and the Local Government Award. Payroll processes and information systems should protect the integrity of employee records and timesheet data, to ensure accurate payments to employees and leave entitlement calculations.
Payroll findings decreased from 136 to 112
Audit management letters reported 112 findings relating to payroll processes (2018–19: 136 findings). Thirty-nine per cent were repeat or partial repeat findings.
There were no high-risk findings related to payroll processes in 2019–20 (2018–19: Nil).
The common payroll findings reported in audit management letters related to deficiencies in the review of employee payroll data and excessive annual leave balances.
Changes to employee payroll data are not reviewed at 35 councils
Thirty-five councils did not have adequate processes in place to review changes to employee payroll data. This includes instances where changes are reviewed, but not by an independent person. This increases the risk of unauthorised changes or errors remaining undetected, resulting in financial loss to councils.
Excessive annual leave balances were reported at 46 councils
Managing excess annual leave was a challenge for councils given the recent emergency events. Councils continued to deliver essential services in uncertain times and in a disrupted work environment. Many council employees, particularly in frontline roles, deferred leave plans and have taken little or no annual leave. To support council employees during the COVID-19 pandemic, legislative amendments were made to allow councils and their employees to agree to:
- council making a payment to an employee in lieu of annual leave, provided the employee will still have a balance of at least four weeks of leave remaining
- an employee taking annual leave at double or half pay.
4.7 Cash and banking
Councils process a high volume of transactions each year. Effective controls over cash collection, disbursements and reconciliations reduce the risk of fraud and error.
Cash and banking findings decreased from 100 to 53
Audit management letters reported 53 findings relating to cash and banking (2018–19: 100 findings). Twenty-six per cent were repeat or partial repeat findings.
High-risk findings related to cash and banking were reported at the following councils. All 2018–19 high-risk findings were resolved.
|Wingecarribee Shire Council (new finding)||
Under section 355 of the Local Government Act 1993, council delegated the management of a number of its halls and sporting fields to volunteer committees.
Committees' cash balances were reported to the council as at 31 May 2020, rather than 30 June 2020 and bank confirmations were not provided for committee bank accounts as at 30 June 2020 for the audit.
Furthermore, council did not comply with their internal policy for at least one employee to be a signatory on committee bank accounts.
|MidCoast Council (new finding)||
Council did not reconcile external confirmations from financial institutions to their investment register. Furthermore, confirmations:
From review of council’s external confirmations, council did not record balances totalling $110,000 as they were unaware of its existence. The bank account was for loan repayments made by a former constituent council (pre-amalgamation).
The common cash and banking findings reported in audit management letters related to the lack of security of payment files and the lack of segregation of duties in the cash handling process.
Lack of security of payment files for pay runs at 12 councils
Twelve councils did not encrypt Electronic Funds Transfer (EFT) payment files from editing or sufficiently restrict access to payment files on the network before they were uploaded to online banking portals. This increases the risk of unauthorised or fraudulent transactions.
Lack of segregation of duties in the cash handling processes at 16 councils
There was a lack of segregation of duties in the cash handling process at 16 councils, including daily cashier balancing and recording mail remittances. There was no independent recount of balances or review of mailed cheque receipts. This increases the risk of undetected balancing errors and misappropriation of cash or cheques.
4.8 Revenue and receivables
Councils receive revenue from a range of different sources, including rates and annual charges, user charges and fees, operating and capital grants and contributions, and other revenue (such as interest, investments and asset disposals). It is important that councils have appropriate internal controls to accurately record revenue and receivables in compliance with accounting standards and legal requirements.
Revenue and receivable findings decreased from 109 to 55
Audit management letters reported 55 findings relating to revenue and receivables (2018–19: 109 findings). Forty-seven per cent were repeat or partial repeat findings.
There were no high-risk findings related to revenue and receivables processes in 2019–20. One of the high-risk findings reported in 2018–19 was resolved, and the other was reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks.
The common revenue and receivables findings reported in audit management letters related to deficiencies in the review of changes to fee tables and property data in council rates systems and inappropriate revenue recognition practices.
Lack of review of changes to fee tables and property data in the rating system at 18 councils
Council systems contain fee tables and property information, which is used to determine rates and annual charges levied on different properties. Eighteen councils do not adequately review changes for accuracy and appropriateness. This increases the risk of errors in recording rates and annual charges in the financial statements.
Inappropriate revenue recognition at 11 councils
Eleven councils had findings raised relating to their revenue recognition practices, including:
- recognising revenue in the financial statements for construction projects on receipt, rather than on progress
- use of cash accounting basis to recognise some revenue transactions, rather than accruals.
Deficiencies in revenue recognition practices resulted in 66 errors identified in council financial statements, totalling $103.2 million.
4.9 Information technology (IT)
Councils rely on IT to deliver services and manage information. While IT delivers considerable benefits, it also presents risks that councils need to address. IT general controls relate to the procedures and activities designed to ensure confidentiality and integrity of systems and data. These controls underpin the integrity of financial reporting.
Financial audits involve the review of IT general controls relating to key financial systems supporting the preparation of council financial statements, addressing:
- policies and procedures
- IT risk management
- user access management
- privileged user access restriction and monitoring
- system software acquisition, change and maintenance
- disaster recovery planning.
IT findings decreased from 584 to 336
Audit management letters reported 336 findings relating to IT (2018–19: 584 findings). Sixty-eight per cent were repeat or partial repeat findings.
High-risk findings, including repeat and ongoing findings, were reported at the following councils. Ten of the 2018–19 high-risk findings were not resolved, and six findings were reclassified to moderate risk in 2019–20 as management has taken action to mitigate the risks.
Bellingen Shire Council
Three high‑risk findings were reported relating to:
Central Coast Council (two new findings)
Two high‑risk findings were reported relating to:
Coolamon Shire Council
There is no formal process to grant and remove access to financial systems. Privileged accounts' activity logs were not maintained and monitored.
Greater Hume Shire Council
Privileged accounts' activity logs were not maintained and reviewed.
Council did not have an implemented IT strategic plan and IT policies and procedures over security, change management, backup, storage and retrieval, business continuity and disaster recovery plan.
Maitland City Council
Three high‑risk findings were reported relating to:
High‑risk finding relating to the migration to a new financial system. See 2018–19 findings section below for more information.
Newcastle City Council
One ongoing (resolution date not due) high‑risk finding reported relating to:
Woollahra Municipal Council
Privileged user accounts' activity logs were not reviewed.
Management could only provide limited evidence to demonstrate how it performs its oversight function for IT general controls over the key systems relevant to financial reporting. There were deficiencies in IT policies, IT risk management, user access management, segregation of duties, backup and monitoring and disaster recovery.
Murrumbidgee Council (one new finding and two repeat findings)
One new high‑risk finding was reported, relating to the migration to a new financial system (Civica Authority). The was a lack of planning, project management and inadequate resourcing for the project. The internal audit review highlighted exceptions and scope limitations where they were unable to conclude on the accuracy and completeness of 31 October 2018 balances transferred from Jerilderie and Darlington Point standalone systems to Civica Authority. Council did not appropriately document the system conversion process, including the opening balances transfer.
Two repeat high‑risk findings were reported, relating to:
^ These audits were finalised after the 'Report on Local Government 2019' was published.
The common IT findings reported in audit management letters related to deficiencies in IT policies and procedures, lack of a cybersecurity framework and controls and gaps in user access management processes.
IT policies and procedures were outdated or not in place at 64 councils
Sixty-four councils did not formalise and/or regularly reviewed their key IT policies and procedures. It is important for key IT policies to be formalised and regularly reviewed to ensure emerging risks are considered and policies are reflective of changes to the IT environment. Lack of formal IT policies and procedures may result in inconsistent and inappropriate practices and an increased likelihood of inappropriate access to key systems.
Cybersecurity frameworks and related controls were not in place at 58 councils
At a State Government level, the NSW Cybersecurity Policy states that 'strong cybersecurity is an important component of the NSW Digital Government Strategy. The term cybersecurity covers all measures used to protect systems and information processed, stored or communicated on these systems from compromise of confidentiality, integrity and availability’. While there is currently no requirement for councils to comply with the State Government’s Cybersecurity Policy, councils may find it useful to refer to the policy for further guidance.
The Report on Local Government 2019 recommended for the Office of Local Government (OLG) within the Department of Planning, Industry and Environment to develop a cybersecurity policy by 30 June 2021 to ensure a consistent response to cybersecurity risks across councils. OLG have indicated that they are working with Cybersecurity NSW to develop a draft cybersecurity policy to share with councils by 30 June 2021. Refer to Appendix three.
Fifty-eight councils did not have the basic governance and internal controls to manage cybersecurity such as a cybersecurity framework, policy and procedure, register or cyber incidents, penetrations testing and training.
Poor management of cybersecurity can expose councils to a broad range of risks, including financial loss, reputational damage and data breaches. The potential impacts include:
- theft of corporate and financial information and intellectual property
- theft of money
- denial of service
- destruction of data
- costs of repairing affected systems, networks and devices
- legal fees and/or legal action from losses arising from denial-of-service attacks causing system downtime in critical systems
- third-party losses when personal information stored on government systems is used for criminal purposes.
Gaps in user access management process, including inadequate periodic review of user access at 43 councils and insufficient monitoring of privileged account activities at 68 councils
The following common access management findings were identified:
- 43 councils did not perform a periodic user access review to ensure users’ access to key IT systems are appropriate and commensurate with their roles and responsibilities
- 68 councils did not monitor privileged accounts' activity logs.
Where robust access management processes are not in place, inappropriate access may exist, increasing the risk of unauthorised transaction or modification of sensitive data and transactions. The common findings above were rated high risk when there was mitigating controls to prevent or detect any unauthorised access.
Audit Office’s work plan for 2020–21 onwards
Focus on local council's response and recovery from recent emergencies
Local councils and their communities will continue to experience the effects of recent emergency events, including the bushfires, floods and the COVID 19 pandemic for some time. The full extent of some of these events remain unclear and will continue to have an impact into the future. The recovery is likely to take many years.
The Office of Local Government (OLG) within the Department of Planning, Industry and Environment is working with other state agencies to assist local councils and their communities to recover from these unprecedented events.
These events have created additional risks and challenges, and changed the way that councils deliver their services.
We will take a phased approach to ensure our financial and performance audits address the following elements of the emergencies and the Local Government's responses:
- local councils' preparedness for emergencies
- its initial responses to support people and communities impacted by the 2019–20 bushfires and floods, and COVID-19
- the governance and oversight risks that arise from the need for quick decision making and responsiveness to emergencies
- the effectiveness and robustness of processes to direct resources toward recovery efforts and ensure good governance and transparency in doing so
- the mid to long-term impact of government responses to the natural disasters and COVID-19
- whether government investment has achieved desired outcomes.
Planned financial audit focus areas in Local Government
During 2020–21, the financial audits will focus on the following key areas:
- cybersecurity, including:
- cybersecurity framework, policies and procedures
- assessing the controls management has to address the risk of cybersecurity incidents
- whether cybersecurity risks represent a risk of material misstatement to council's financial statements
- budget management
- financial sustainability
- quality and timeliness of financial reporting
- infrastructure, property, plant and equipment
- information technology general controls.
Audit, risk and improvement committees
All councils are required to have an audit, risk and improvement committee by March 2022
The requirement for all councils to establish an audit, risk and improvement committee was deferred by 12 months to March 2022 due to the COVID 19 pandemic.
Audit, risk and improvement committees are an important contributor to good governance. They help councils to understand strategic risks and how they can mitigate them. An effective committee helps councils to build community confidence, meet legislative and other requirements and meet standards of probity, accountability and transparency.
Local Government elections
Local Government elections were postponed for one year due to the COVID 19 pandemic
The Local Government elections were deferred for one year due to the COVID 19 pandemic and will now be held on 4 September 2021. As the statutory deadline for the 2020–21 financial statements is 30 October 2021, some of the newly elected councillors will be required to endorse them.
Implementation of AASB 1059
Accounting standards implementation continue next year
AASB 1059 is effective for councils for the 2020–21 financial year.
A service concession arrangement typically involves a private sector operator that is involved with designing, constructing or upgrading assets used to provide public services. They then operate and maintain those assets for a specified period of time and is compensated by the public sector entity in return. Examples of potential service concession arrangements impacting councils include roads, community housing, childcare services and nursing homes.
AASB 1059 may result in councils recognising more service concession assets and liabilities in their financial statements.
These tasks should be completed well before the balance date so that they do not impact on the timely preparation of the financial statements at year end.
© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.