Local Government Briefing for Audit, Risk and Improvement Committee Chairs 20 April 2018
Agenda Welcome by the Deputy Auditor-General Financial Audit report to Parliament Discussion and comment BREAK 11.15am ICAC focus on Local Government Information Technology risks and focus areas Performance Audit reports to Parliament Closing by the Auditor-General LUNCH 12.30pm
Welcome Deputy Auditor-General Ian Goodwin
Financial Audit Report to Parliament Steven Martin, Assistant Auditor-General
Council data visualisation
Context for our insights • Each council has unique characteristics such as size, location, range of services • A ‘one size fits all approach’ may not be appropriate • Audits process may not detect everything • Internal control environment, risk management procedures and governance structures may need to differ.
Council spending on services by function
Quality of financial reporting • Modified audit opinions in 2016-17 for three councils • Modified audit opinions in 2015-16 for one council and one water authority • One emphasis of matter in the unmodified audit opinion • Unmodified opinions for the remaining councils, however • 33 material prior period errors across 22 councils • 39 significant matters in 29 councils.
Quality of financial reporting Material prior period errors identified across the 2016–17 financial aud its Valuation methodology for community land and land under roads did not consider restrictions on the use of these assets First time recognition of assets Accounting for assets not controlled by councils Other 0 2 4 6 8 10 12 14 16 Number of prior period errors
Quality of financial reporting Significant matters reported across the 2016–17 financial audits Valuation of infrastructure, property, plant and equipment Valuation of community land and land under roads Asset accounting issues Internal control deficiencies Incorrect revenue recognition Other 0 2 4 6 8 10 12 Number of significant matters
Quality of financial reporting • The financial statements close process can improve • Our report includes better practice guidance • ARIC’s role in reviewing financial statements • OLG needs to release key guidance earlier in the year.
Timeliness of financial reporting Timeliness of financial reports lodgement with OLG 80 70 Number of councils 60 50 40 30 20 10 0 Week ending Number of councils
Early close procedures Complete infrastructure, property plant and equipment valuations Prepare proforma financial statements and associated disclosures Prepare variance analysis and meaningful explanations for movements in financial balances Perform key account reconciliations Assess the impact of material, complex and one-off significant transactions Resolved prior year audit issues Assess the impact of new and revised accounting standards Review of financial statements and processes
Financial performance and sustainability
Operating revenue measures Operating performance Own source operating revenue 60 60 50 50 Number of councils Number of councils 40 40 30 30 20 20 10 10 0 0 Metropolitan Regional Rural County Metropolitan Regional Rural County Councils did not meet benchmark Councils met benchmark Councils did not meet benchmark Councils met benchmark
Revenue and expenses Categories of council expenses Sources of council revenue 100% 100% 90% 90% 80% 80% 70% 70% % of expenses % of revenue 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Metropolitan Regional Rural County Metropolitan Regional Rural County Rates and annual charges User charges and fees Employee benefits Materials and contracts Depreciation and amortisation Other expenses Grants and contributions Other revenue Borrowing costs
Liquidity and working capital measures
Liquidity and working capital measures • All but three councils met the unrestricted current ratio • All but two councils met the debt service cover ratio.
Asset management measures • Asset indicators question whether councils’ spend enough on renewing and maintaining infrastructure assets • Seventy councils do not meet OLG’s buildings and infrastructure renewals ratio benchmark • Eighty-four councils do not meet OLG’s infrastructure backlog ratio benchmark • Seventy-one councils do not meet OLG’s asset maintenance ratio benchmark • Councils may need to review their asset management plans.
Asset management
Asset management findings High-risk issues related to: • accuracy of asset registers • restricted assets • asset valuations. Land assets overstated by $12.1 billion Councils with no asset management strategy, policy and plan
Asset useful lives
Unrecorded assets
Governance and internal controls Governance and internal control deficiencies reported in management letters Information technology 9 201 42 Asset practices 10 153 55 Purchases and payables 5 97 28 Governance 4 100 23 Payroll 1 70 55 Financial accounting 7 89 58 0 50 100 150 200 250 High risk (36) Moderate risk (710) Low risk (261)
Audit committees and internal audit
Other governance matters • Missing or out of date policies and procedures • No legislative compliance framework, policy or register • Opportunities to improve risk management • Council entities.
Discussion, comment, questions
BREAK
Independent Commission Against Corruption (ICAC)
Information Technology – risks and focus areas
IT findings • Nine high risk issues reported • Findings in two broad areas: • access to IT systems • IT governance • Increased risk of fraud and error.
User access controls Effective user access control involves the Audits found 107 issues across following good practice: 56 councils Clear policies and procedures. Formal approval to establish and modify user accounts. Staff with access beyond their Removal of access when no role requirements longer required Regular review of user access Password parameters in line with good practice Clear records of user access
Privileged access controls • Ability to change key system configurations • Wide access to system data, files and accounts • Audits found 86 issues across 64 councils: • staff and third-party contractors with unmonitored access • no logging and/or review of highly privileged access • sharing of highly privileged user accounts.
User developed applications • Computing applications, tools and processes developed or managed outside IT administration • There are reasons why these tools are used • Mitigating controls • Audits found: • councils using spreadsheets without appropriate controls • councils where non-IT staff could modify financial databases.
IT governance • Audits found: • councils without an IT strategy and IT operational plan • councils without an adequate IT security policy • councils without adequate back up, disaster recovery and business continuity arrangements.
Performance Audit
Our first three performance audits in local government Three Topics • Fraud control Due for public release in May 2018 • Shared services Due for public release in June 2018
Reporting on service delivery Key Findings • Need greater emphasis on reporting efficiency and effectiveness of services • Report performance over time • Use targets related to service objectives • IP&R Framework could be improved to support better reporting • Consolidating council reporting to state agencies would support better reporting.
Reporting on service delivery Recommendations OLG should, by mid-2018: • issue additional guidance on good practice in reporting • clearer integration of all reports required by the IP&R Framework • consolidate reporting by councils to state agencies • work with rural councils to develop their reporting capability • define reporting terms to encourage consistency • develop a Performance Management Framework to deliver sector wide reporting.
Performance audits recently released of interest to councils
Performance audit program 2018-19 Performance audits underway • Risk management culture and capability • Grants to non-government schools • Regional Assistance Programs • Property asset utilisation • Ausgrid: Unsolicited proposal to acquire 50.4% interest in Ausgrid • Health Roster Benefits Realisation
Performance audit program 2018-19 Performance audits underway • Regulation of Waste and Water • Assessing Progress of Premier’s and State Priorities (including Premier’s Implementation Unit) • Newcastle Urban Transformation and Transport Program • Antisocial behaviour in social housing
Performance audit program 2018-19 Performance audits underway • Matching Skills training with market need • Planning for New and Revitalised Communities • Mobile Speed Cameras. Currently developing our audit program for 2019-20 and 2020-21.
Closing Auditor-General Margaret Crawford
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