The Department recorded a net deficit of $30.7 million in 2017–18 against a budgeted surplus of $122 million.

The NSW Education Standards Authority recorded a net deficit of $4.1 million against a budgeted deficit of $4.7 million.

The LMBR program has been a major project for the Department since it was established in 2006.

A staged approach was adopted for implementing the Department’s new HR/Payroll system to manage the risks associated with this large-scale roll-out.

A market approach was used to revalue the Department’s land, resulting in a revaluation increment of $2.3 billion.

A current replacement cost approach was used to revalue the Department’s school buildings, resulting in an increment of $6.2 billion.

RMS incorporated data from its asset condition assessments for the first time in the valuation methodology which improved the valuation outcome. Overall, we were satisfied with the valuation methodology and key assumptions, but we noted some deficiencies in the asset data in relation to asset component unit rates and old condition data for some components of assets. 

Also, a bypass and tunnel were incorrectly excluded from RMS records and valuation process since 2013. This resulted in an increase for these assets’ value by $133 million.

The valuation inputs for Wetlands and Moorings were revised this year to better reflect the assets' characteristics resulting in a $98.0 million increase.

Majority of this write-off was recognised by RMS, with $199 million relating to the write-off of existing assets which have been replaced during the year. 

Qualified audit opinions
We issued unmodified audit opinions on the: 

• 2016–17 financial statements of 136 councils and two water authorities 
• 2015–16³ financial statements for seven councils and two water authorities.

We issued modified (qualified) opinions on the:

• 2016–17 financial statements of three councils 
• 2015–16 financial statement of one council and one water authority.

Councils with modified opinions should address the issues that give rise to the audit qualification.

Operating performance
Operating expenses for 18 councils exceeded their operating revenue.

Another 20 councils would not have met OLG’s operating performance benchmark without the receipt of 2017–18 financial assistance grants which was recorded as revenue during 2016–17.

Eleven councils have not met OLG’s operating performance benchmark for the last three years.

Own source operating revenue
Fifty-nine councils did not meet OLG’s benchmark, and 42 of those were rural councils.

Unrestricted current ratio
All but three councils met OLG’s benchmark.

Debt service cover ratio
All but two councils met OLG’s benchmark. These two councils did not meet OLG’s benchmark due to the early repayment of borrowings.

Regional councils have 56 per cent of the value of all borrowings in the sector.

Most councils have sufficient operating cash available to service their borrowings.

Regional councils borrow more heavily than metropolitan councils to deliver water and sewerage infrastructure. Metropolitan councils do not have the responsibility to provide water and sewerage infrastructure.

Rates and annual charges outstanding
Eight rural, five regional, three metropolitan and two county councils did not meet OLG’s benchmark.

These councils also did not meet the infrastructure backlog ratio.

Cash expense cover ratio
Three rural and two county councils did not meet OLG’s benchmark.

This measure does not exclude externally and internally restricted funds. If externally restricted funds are excluded, all councils would still meet OLG’s benchmark. If both externally and internally restricted funds are excluded:

• an additional 32 councils would have a cash expense cover ratio of less than three months
• a further nine councils are left without any unrestricted funds for general operations.

Building and infrastructure renewals ratio
Seventy councils reported to OLG they do not meet the benchmark for this ratio.

Most councils included expenditure related to work-in-progress in calculating this ratio. OLG are of the view that work-in-progress should be excluded and as a result identified that a further 23 councils do not meet the benchmark.

These councils appear to not be renewing assets in line with the rate they are depreciating them. This raises questions as to whether council asset management plans are adequate to determine whether assets are being kept up to agreed standards.

Uncertainty on the inclusion of work-in-progress assets does need to be is clarified in order to ensure consistency in determining whether councils are adequately renewing their assets.

Infrastructure backlog ratio
Eighty-four councils reported to OLG that they do not meet the benchmark for this ratio.

Asset maintenance ratio
Seventy-one councils reported to OLG they do not meet the benchmark for this ratio

Costs to bring assets to agreed service level
One-hundred and two councils reported results against this indicator to OLG. The reported results ranged from 0.1 per cent to 19.8 per cent.

Significant matters reported to those charged with council governance
Our 2016–17 audits identified ten high risk issues related to the accuracy of asset registers, restricted assets and asset revaluations.

Accuracy of asset registers
Our audits identified instances where councils had multiple asset registers, inaccurate or incomplete registers, unreconciled registers, or uncontrolled manual spreadsheets.

Unrecorded land and infrastructure assets
Twenty-four councils had not recorded $145 million worth of assets, mainly land and infrastructure assets.

Rural fire-fighting equipment
At 30 June 2017, forty-six councils did report vested rural fire-fighting equipment in their financial statements. However, 62 councils did not record vested fire-fighting equipment in their financial statements. These rural fire‑fighting equipment assets are not reported in either State government or local government financial statements.

Recommendation
The Office of Local Government should address the different practices across the local government sector in accounting for rural fire‑fighting equipment before 30 June 2018.

In doing so, the Office of Local Government should work with NSW Treasury to ensure there is a whole‑of‑government approach.

Restricted assets
Our audits found that ten councils did not appropriately consider restrictions on the use of community land and land under roads when determining asset fair values in accordance with Australian Accounting Standards.

Nine councils corrected the land values in their 2016–17 financial statements, reducing the reported value of community land and land under roads by $12.1 billion.

The valuation of community land and land under roads should reflect the physical and legislative restrictions on these assets as required by Australian Accounting Standards. The impact of restrictions can be significant.

Councils should consider engaging experts to assist with the determination of asset fair values, as necessary.

Asset useful life estimates
We found considerable variability in councils' useful lives for similar assets.

In some cases, the useful lives of assets are not reviewed annually or supported by regular condition assessment.

Depreciation is a significant expense for councils and therefore impacts on reported financial results and key performance indicators.

To comply with Australian Accounting Standards, councils need to reassess the useful lives of all assets annually.

Regular condition assessments are essential to identify maintenance requirements and maintain service delivery.

• seventeen high risk issues relating to governance, purchase-to-pay, financial accounting and payroll processes
• ten high risk issues relating to asset practices
• nine high risk issues related to information technology management.

Proposed legislative changes will require councils to establish an audit, risk and improvement committee by March 2021.

Recommendation
Councils should early adopt the proposed requirement to establish an audit, risk and improvement committee.

Internal audit
Councils are currently not required to have an internal audit function. Consequently, 52 councils do not have this function.

Recommendation
The Office of Local Government should introduce the requirement for councils to establish internal audit functions and update its 2010 Internal Audit Guidelines.

Council entities
The Office of Local Government's register of entities approved under section 358 of the Local Government Act 1993 is incomplete.

Recommendation
The Office of Local Government should maintain an accurate register of council entities approved under section 358 of the Local Government Act 1993.

Recommendation
The Office of Local Government should establish a financial reporting framework for council entities.

Policies and procedures
We identified 50 high and moderate risk issues across 33 councils where policies and procedures over critical business processes did not exist or had not been updated.

Legislative compliance frameworks
Our audits found that 45 councils do not have sufficient processes to show they are complying with legislative requirements.

Risk management
We identified 15 high and moderate risk issues across 15 councils where risk management practices could be strengthened.

Financial accounting
We identified 45 high and moderate risk control deficiencies across 41 councils concerning the use of manual journals to adjust council financial records. This can increase the risk of fraud and error.

We identified 51 high and moderate risk issues across 39 councils where reconciliation processes need to improve to support the preparation of accurate financial statements

Sound financial accounting processes include controls to ensure:

• a person other than the preparer authorises manual journals
• key account reconciliations are prepared and reviewed.

As councils spend a substantial amount each year to procure goods and services, strong controls over purchasing and payment practices are critical. These include:

• a review of changes to vendor master file data by an appropriate independent officer
• an independent review and approval of purchases, including credit card transactions
• compliance with Tendering Guidelines for NSW Local Government.

Payroll
We identified 71 high and moderate risk deficiencies in payroll controls across 48 councils. Weaknesses in payroll controls could result in incorrect payments being made to employees, due to error or fraud.

Managing excess annual leave balances was a challenge for 32 councils.

Effective payroll controls are important because employee expenses represent a large portion of council expenditure. These controls include segregation of duties in the review of payroll master file data, timesheets, leave forms, payroll exception reports and termination payments.

Excessive annual leave balances can have implications on employee costs, disrupts service delivery and affect work, health and safety. Excess annual leave balances should be continuously monitored and managed.

Inadequate IT policies and controls around user access, including privileged access, increases the risk of individuals having excessive or unauthorised access to critical financial systems and data.

Privileged access
We identified 86 examples across 64 councils of inappropriate privileged access, inadequate review of access and insufficient retention and review of access logs.

User developed applications
User developed applications (UDAs) are computing applications, tools and processes developed or managed outside IT administration. UDAs may allow users to bypass formal user access controls.

Our audits found 22 councils using spreadsheets for business operations, decision making and financial reporting that were not adequately secured, with changes that were not tracked, tested or reviewed.

We also identified five councils where finance staff and senior management use database query tools to directly modify financial data, circumventing system-based business process controls.

It is important councils are aware of all circumstances they are relying on UDAs to limit the risk of errors and potential misuse. This allows councils to:

• transition UDA functions to internal systems where possible
• ensure UDAs are adequately controlled where they continue to use them
• regularly review access rights to UDAs and back-up business-critical information.

Strategy, policies and procedures
Around one in four councils do not have an IT strategy or operational plan. Some councils also need to develop or improve IT policies and procedures.

Sixty-six councils do not have an adequate information security policy.

IT governance is enhanced where there is:

• a fit-for-purpose IT strategy and operational plan
• appropriate policies, standards and guidelines across all critical IT processes
• a formally defined process to support security and access to all systems.

Disaster recovery and business continuity
Our audits identified that 17 councils do not have a documented plan to recover critical business functions in the event of a disaster.

The ability to restore data from backups is critical to ensure business continuity in the face of a system disaster.

We also found that 15 councils do not periodically test their ability to restore backups of data relevant to financial reporting.

Sound management of disaster recovery and business continuity includes:

• a documented plan for how critical business functions will be recovered in the event of a disaster, which is periodically reviewed and tested
• the ability to restore backed-up data, which is periodically tested.

We expect to focus on these areas in our future audits.