Victorian Auditor-General’s report
9 February 2011

Acquittal Report Annex B:
Local Government
Audit summary
This annex sets out the results of the audit of 104 local government entities, comprising 79 councils, 13 associated entities and 12 regional library corporations (RLCs). An assessment is also made of the financial sustainability of the 79 councils and 12 RLCs. 
Results of audits
Independent audit opinions add credibility to financial reports by providing assurance that the information is reliable. All 104 entities finalised their 30 June 2010 financial reports, standard statements and performance statements where applicable, and all but three entities received clear opinions.
The financial statements of the City of Greater Dandenong were qualified as the net underlying result from operations reported in the comprehensive income statement excluded items that are part of the operations of the council. This is contrary to the requirements of Australian Accounting Standard AASB 101. It is important to note however that these expenditure items were included in ‘other non operational expenses’ and therefore council’s operating result for the year was not affected. A clear opinion was issued on the standard statements.
Alpine Shire Council was non-compliant with section 132 of the Local Government Act 1989 (the LG Act) as they did not prepare a performance statement as the prerequisite performance targets and measures had not been set in the 2009–10 budget. 
Yarra Ranges Shire Council’s performance statement warranted a qualification as their performance targets and measures were not set in their annual budget as required by the LG Act but from a revised budget which was used for reporting.
Quality of financial reporting 
The quality of financial reporting can be measured by the timeliness and accuracy of the preparation and finalisation of the financial report.
The financial reporting processes at councils were generally adequate. However, further improvement could be achieved by developing financial report preparation plans, shell financial statements, conducting materiality assessments, financial compliance reviews and adopting rigorous analytical reviews.
The average time taken to finalise financial statements was consistent with last year at 11.1 weeks. This was considerably longer than for the state sector where portfolio departments averaged 7.6 weeks, public hospitals averaged 7.9 weeks and water entities averaged 7.4 weeks. 
Across all councils 56 material adjustments were made to financial balances and 63 significant disclosure errors were detected. A large number of these adjustments occurred at large shire and inner metropolitan councils, indicating a need for greater rigour in their financial statement preparation processes.
Financial sustainability
Financial sustainability analysis has been provided for the 79 councils and 12 RLCs.
To be financially sustainable, councils and RLCs should have the capacity to meet current and future expenditure as it falls due. They should also be able to absorb foreseeable changes and risks materialising, without significantly changing their revenue and expenditure policies.
Insight into the financial sustainability of councils is obtained from analysis of four core financial sustainability indicators over a five-year period from 2005–06 to 2009–10. The four core indicators used are underlying result, liquidity, self-financing and capital replacement. These indicators reflect each council’s funding and expenditure policies, and indicate whether these policies are sustainable.
In addition to the four core sustainability indicators, two further indicators are assessed for councils:
·	indebtedness—measures a council’s ability to cover non-current liabilities from revenues they generate themselves
·	renewal gap—comparison of the rate of spending on renewing, restoring and replacing existing assets, with depreciation. 
These indicators reflect two particular risks for local councils—managing debt and maintaining assets to sustain current service levels.
RLCs financial sustainability indicators are derived from analysis of three of the four core financial sustainability indicators: underlying results, liquidity and capital replacement. The fourth core indicator of self-financing is not applied to RLCs as they do not generate significant amounts of own source revenue and are reliant on member councils making annual contributions.
A summary of the five-year average financial sustainability assessments for the 79 councils and 12 RLCs is provided in Figure A. 

Figure A
2009–10 financial sustainability risk assessment – local government
Category	High	Medium	Low	
Councils				
Inner metropolitan	–	1	16	
Outer metropolitan	–	1	13	
Regional city	–	–	11	
Large shire	–	–	15	
Small shire	1	2	19	
Total	1	4	74	
Regional Library Corporations	2	3	7	
Source: Victorian Auditor-General’s Office.
Financial sustainability of councils has improved in 2009–10 with the number of low‑risk rated councils increasing from 71 to 74, and the number of medium-risk rated councils decreasing from eight to four. However, Buloke Shire Council has been rated high risk, previously rated medium risk.
Consistent improvement is demonstrated in our analysis over the five-year period by a decreasing number of councils with individual ratios assessed as medium and high risk. The capital replacement and renewal indicators have been assessed as medium risks for all council categories. This means the sector needs to continue addressing the challenge of spending to maintain existing assets.  
The financial sustainability of Buloke Shire Council has been assessed overall as high risk. This was because the council had insufficient liquidity at 30 June 2010, indicating short-term or immediate sustainability concerns which need to be addressed.
RLCs generate little of their own revenue, and are highly dependent on the annual contributions from councils. Goulburn Valley RLC and Yarra Plenty RLC are assessed as high financial sustainability risks because of insufficient liquidity at 30 June 2010. This risk is mitigated as both RLCs have commitments to receive council contributions in the new financial year to meet the operating costs of the libraries for 2010–11.
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Department of Planning and Community Development and named entities with a request for comments or submissions.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) comments and submissions, however, are included in Appendix C.