Fraud and Corruption Control—Local Government

Tabled: 19 June 2019

Audit overview

Elected councillors and local government employees make decisions and perform functions that affect the lives and interests of all Victorians. The community expects—and the law requires—that they do this responsibly and with integrity, accountability, impartiality, and in the public interest.

The culture of an organisation is a key control that can help it to prevent, detect and respond to fraud and corruption. If the senior leadership of an organisation does not model, communicate and support appropriate values and behaviour, this can reduce the organisation's ethical culture and leave it vulnerable to fraud and corruption. Fraud and corruption undermines public trust in local government and damage the reputation of the sector. When fraudulent and corrupt activities are undetected, or left unchecked, public money and resources are wasted.

Fraud is dishonest activity involving deception that causes actual or potential financial loss by an entity or others.

Corruption is dishonest activity in which an employee of an entity acts contrary to its interests, abusing their position of trust to achieve personal gain or advantage.

The objective of this audit was to determine whether local councils' fraud and corruption controls are well designed and operating as intended. We examined fraud and corruption controls at Greater Shepparton City Council (Shepparton), Strathbogie Shire Council (Strathbogie), Wellington Shire Council (Wellington) and Wyndham City Council (Wyndham). We primarily focused on expenditure and processes involving senior council staff and councillors. We reviewed fraud and corruption controls and measures to assess council practices relating to:

  • councillor and senior staff credit card and fuel card use and reimbursements
  • identifying and managing conflicts of interest
  • responding to suspected incidents of fraud and corruption.

The testing period for our audit was July 2015 to June 2018. However, when we identified anomalies, where appropriate, we extended the testing period as far as February 2019.

Conclusion

There are gaps in the fraud and corruption controls at the audited councils and in some cases important controls are not working. The failure of these controls can foster a culture in which fraud and corruption can occur and go undetected and result in financial loss or reputational damage to the councils. While we did not find fraud or corruption in the transactions we examined, we identified:

  • expenditure where it was unclear to us how residents and ratepayers benefited
  • practices that may not meet public expectations
  • non-compliance with legislative requirements aimed at ensuring transparency over council practices to their communities and regulators.

Some individuals in positions of authority need to take a broader view of their obligations. They must appreciate that they are accountable to ratepayers and residents and consider how their communities may perceive their actions.

Findings

Fraud and corruption controls over councillor entitlements and expenditure

Inadequate documentation to support reimbursement claims and approvals

A key control to prevent and deter fraud and corruption is maintaining an adequate audit trail of documentation and data to support reimbursements. Under the Local Government Act 1989 (the Act), councils must ensure that councillor reimbursement claims are reasonable and bona fide, and that the councillor incurred the expense when performing their role. Maintaining accurate financial records is also a financial reporting requirement. We identified issues including:

  • three examples of reimbursements at Shepparton, from a selection of 12, with missing councillor claim forms
  • six examples of reimbursements at Strathbogie, from a selection of 20, where the business reason, or council event, for which the expense was incurred was not detailed on the claim form.

While these expenses may be valid, the councils' failure to maintain adequate documentation inhibits full public scrutiny of these transactions.

Vehicle mileage

The audited councils' policies provide for the reimbursement of mileage to councillors when they use their private vehicles for council business. However, some of the audited councils are not ensuring councillors submit adequate documentation to support their mileage reimbursement claims.

The councils' policies vary in their requirements for supporting documentation. At present, Wellington's policy has no requirement to provide supporting documentation, such as an odometer reading or a tax invoice for fuel purchased, and Wyndham's policy only requires 'appropriate records'.

Strathbogie does not have clear requirements for supporting documentation for mileage claims, and does not, for example, require councillors to provide odometer readings. While Strathbogie's policy requires councillors to provide 'a receipt or tax invoice for any expenditure', the supporting claim form has no requirement for councillors to attach a receipt or tax invoice for mileage claims. None of the 10 approved mileage claims we reviewed at Strathbogie had any supporting documentation. Shepparton requires councillors to provide logbooks to support reimbursement claims; however, none of the five approved claims we tested had any supporting evidence attached.

Extra entitlements

Councils outline the level of benefits and support they provide to councillors in entitlement policies. These policies permit councils to provide, for example, meals for councillors when council meetings extend through normal meal times or accommodation when councillors travel for council business.

In our testing of credit card transactions, we identified four transactions at Wellington and two at Wyndham where council officers had made purchases for the benefit of councillors without a clear business need. This included the purchase of alcohol at Wellington for council meetings. We also identified one dinner at Wellington between senior council staff and new councillors and their partners that was not related to travel or council meetings. At Wyndham, we identified meals between senior council staff and councillors that were not related to travel or council meetings.

When councillor entitlements are outside policy boundaries and have unclear business purposes, it creates a risk that they do not meet community expectations.

Additional financial allowance

Under the Act, councillors receive a financial allowance for performing their role. The Minister for Local Government (the Minister) determines an allowance range, within which councils decide an amount. Councillors should not receive additional payments unless they are reimbursements for expenses incurred as part of official council business, supported by documentation that shows this.

Wyndham does not adhere to this, providing each councillor with an $800 lump sum 'hard copy printing allowance' per year to purchase a printer, paper and toner. While this allowance is included in Wyndham's reimbursement policy, the council does not require councillors to provide evidence as to how they spent the $800 printing allowance and pays the money directly to the councillor. The business need for this allowance is also unclear, as Wyndham provides councillors with a laptop or equivalent and the use of printers at council offices. Under the policy, the council will also reimburse councillors for printing costs, in addition to this printing allowance.

In contrast, Shepparton provides no printing allowance or reimbursements to councillors. Shepparton provides its councillors with tablets and the ability to use printers at council offices and does not offer any further printing entitlement.

Perception of 'double-dipping'

Councils need to consider how residents and ratepayers may perceive their actions in both providing equipment and reimbursing councillors for similar items or resources. Councils need to ensure that there is not a perception of 'double-dipping' or excessive entitlements.

We identified one example of Strathbogie reimbursing a councillor's entire private telephone and internet bill, despite the council already providing and covering the costs of a work mobile telephone. Reimbursement forms show that the councillor had not itemised the bills for reimbursement purposes, as required by policy, yet the council reimbursed them in full.

Failing to report councillor expenses as required by legislation

The Local Government (Planning and Reporting) Regulations 2014 (the Regulations) require councils to detail in their annual report each councillor's expenses in five categories—travel, vehicle mileage, childcare, information and communication technology, and conference and training expenses.

Only one of the four councils, Wellington, fully complied with this legislative requirement in 2017–18 annual report, which aims to provide transparency and enable scrutiny of councillor expenses. Shepparton did not report councillor expenses using the five required categories, Wyndham combined some of the categories, and Strathbogie combined allowances paid and expenses to report a total payment figure.

Fraud and corruption controls over council staff expenditure

While we did not identify instances of fraud or corruption in the transactions we examined, we found examples where controls are failing. These weaknesses provide an environment in which fraud and corruption can occur, potentially go undetected and breach public trust.

Credit cards

Controls over credit card use at the audited councils are, at times, inconsistently applied or are failing. We found:

  • instances of inadequate documentation to confirm that transactions were made for official council business
  • transactions contrary to stated council policies and procedures, including the payment of parking infringements at Strathbogie incurred by the chief executive officer (CEO) and a councillor, the costs of which were subsequently refunded after these individuals reviewed our draft report
  • instances at Shepparton, Wellington and Wyndham where non-cardholders used cards allocated to others
  • two instances at Wyndham where a non-cardholder used a card after the allocated cardholder left the council, and this non-cardholder also approved the transactions.

We also found inadequate scrutiny by approvers of transactions, such as:

  • at Strathbogie, where a senior executive both witnessed a staff member's incomplete and undated statutory declaration, when the staff member failed to present tax invoices, and approved the transaction, contrary to policy
  • at Wyndham, where the CEO incurred expenses on an administrative officer's card and approved the expenditure.

Data analytics can allow an agency to review large amounts of data and identify anomalies that may indicate fraud and corruption. We found that the audited councils did not have formalised processes to conduct data analytics of credit card transactions to identify and report anomalies. Wyndham and Shepparton have now started projects to report using data analytics.

Staff reimbursements

At Strathbogie, we found examples of inadequate documentation to support staff reimbursements and insufficient scrutiny by approvers, including:

  • $21 700 reimbursed to a senior executive for their rent, which the council described as a salary packaging arrangement, but had no supporting documentation other than an email in which the senior executive described the arrangement between the council and themselves as a 'loose agreement'
  • $3 085 in relocation expenses when there was no evidence that the staff member paid the amount to warrant reimbursement
  • reimbursement of 100 per cent of course fees valued at $4111.50 when the supporting documentation stated that only 50 per cent could be reimbursed.
Fuel cards

Not all councils have fuel card policies or guidelines, and those that do are out of date or do not detail consequences for misusing fuel cards.

Although councils can apply fuel card restrictions, such as preventing the purchase of different fuel types, our testing found that blocks were not in place for all fuel cards and at times councils failed to:

  • assign each fuel card to a specific vehicle or equipment
  • maintain accurate motor vehicle and fuel card records
  • update cardholder names with fuel suppliers when the council reassigns a vehicle and fuel card to another employee
  • collect fuel transaction data as accurately as possible, including odometer readings to enable data analytics
  • routinely monitor fuel card use, with only one council having conducted an internal review on fuel cards in the past three years.

We identified anomalies due to these control gaps, such as the purchase of different fuel types, but these could not always be explained. The councils' failures to implement controls, including regular, routine monitoring, leave them susceptible to fuel card misuse.

Maintaining public trust

Managing conflicts of interest

All councillors and council employees have private interests. These private interests can at times conflict, or be perceived to conflict, with the performance of their public duties. Effective management of such conflicts of interest is vital to maintain public trust and ensures council decisions are free from inappropriate influence.

Under the Act, councillors and nominated staff must lodge interest returns, called Ordinary Returns, every six months.

Under the accounting standard, key management personnel (KMP), which includes councillors, must complete Related Party Disclosures and declare associations and interests to identify transactions with related parties.

We identified one example where a councillor at Wellington failed to have their Ordinary Return witnessed per legislative provisions. The councillor instead used a photocopy of a previous return and changed the date.

When we reviewed interest disclosures made under the Act with disclosures under the Australian Accounting Standards Board AASB 124 Related Party Disclosures (the Accounting Standard) and data from the Australian Securities and Investments Commission (ASIC), we identified anomalies across Shepparton, Wellington and Wyndham. We referred these matters to the Local Government Inspectorate (LGI) for consideration, as LGI is the responsible authority for investigating anomalies and prosecuting offences under the Act.

Strathbogie KMP did not complete Related Party Disclosures in 2016–17, when it first became a requirement.

We also identified 10 examples in our credit card transaction testing at Strathbogie of a former manager buying gifts for, and dining with, suppliers, which raises the risk of perceived or actual conflicts of interest.

Effective use of funds
Meals and alcohol

We identified transactions involving the purchase of meals and alcohol at Strathbogie, Wellington and Wyndham that were not related to travel or council meeting catering. While councils may consider that spending council funds on meals and alcohol is appropriate in some circumstances, they need to consider community expectations and perceptions that are associated with this type of expenditure.

Selling and providing vehicles to staff

At Strathbogie, we identified six instances of the council directly selling vehicles to staff, at times below market value, and providing vehicles to staff as part of exit packages. The council also incurred additional vehicle-related expenses due to this practice.

Selling vehicles under market value or providing cars to employees—as well as paying additional expenses such as new tyres before the council transfers the vehicle—risks creating a perception of inappropriate or excessive entitlements for council employees. Further, a car that a council does not dispose of through a competitive auction represents a potential financial loss to the council and its residents and ratepayers.

Staff contributions to private use vehicles

Private-use vehicles are those that a council has assigned to an employee based on their role. Private-use vehicles differ from fleet vehicles in that the assigned employee may drive the car in their private time. Offering private-use vehicles can be a way for councils to attract and retain staff.

To have a council car for private use an employee will make annual contributions, negotiated as part of their employment package and contract. Although these contributions are subject to contract negotiation, private use of a council vehicle is ultimately funded by ratepayers and so must be transparent.

We found that Strathbogie and Wellington do not have transparent processes for calculating contributions and are not complying with their own policy requirements, resulting in some staff contributions towards their vehicles remaining the same for years. This means that expected increases in vehicle-related expenses—which should be incurred by individuals receiving the benefit—are being borne by the council and its ratepayers. Wyndham uses novated leases, a private arrangement between an individual and a company—with no impact on council expenditure.

Failing to report total remuneration, including motor vehicles

The Accounting Standard requires councils to report the remuneration of their executives (including non-monetary benefits) in annual reports. Where it is not possible to determine the value of a benefit, the Accounting Standard requires councils to provide a qualitative description in a footnote. This practice provides transparency of the council's expenditure and the benefits received by senior council staff.

We found that Strathbogie's 2017–18 annual report does not include a footnote for one senior executive's remuneration to capture the benefit of a motor vehicle. As a result of contract negotiations, the senior executive ceased making contributions in the last month of the financial year. Strathbogie advised that, subsequently, it omitted to include a footnote and the council will rectify this in its 2018–19 annual report.

Responding to fraud and corruption

The audited councils have varying levels of tools to support responses to fraud and corruption risks, as seen in Figure A.

Figure A
Tools to support response to fraud and corruption

Elements of fraud and corruption control framework

Shepparton

Strathbogie

Wellington

Wyndham

Protected Disclosure procedures made publicly available on council website at time of audit testing that include contact details for the Protected Disclosure Coordinator

(a)

(a)

Fraud and corruption control policy implemented

Fraud and corruption training provided to staff

Fraud and corruption incident register maintained

(a)

(a)

(a) Now compliant following VAGO findings.
Source: VAGO, based on council data.

Responding to potential instances of fraud and corruption

We identified instances at Strathbogie and Wyndham where the councils failed to respond appropriately to repeated non-compliance with policy.

For example, responsible staff at Strathbogie did not identify repeated non‑compliance with its purchasing card policy by a staff member as a fraud and corruption risk. At Wyndham, responsible staff did not suspend a staff member's card privileges while they were subject to an investigation for allegations of card misuse—which were ultimately substantiated—and did not maintain full records of the investigation.

We did not identify similar instances at Shepparton or Wellington.

Recommendations

All councils should consider our findings to determine if our recommendations are applicable to their operations and perform their own self-assessment of their fraud and corruption controls.

We recommend that councils:

1. require councillors to certify that their expense claims are incurred in the context of relevant legislative provisions. Councils must require councillors to provide stronger evidence to support their claims, in particular for mileage reimbursements, including records pertaining to the claim and details of the business reason and who benefited from the expense (see Section 2.2)

2. review and update fuel card policy and guidance to clearly outline fraud and corruption controls, and require staff to confirm that they understand the terms of use and consequences for misuse (see Section 3.5)

3. review credit card policies and improve controls to ensure only allocated cardholders use their cards and there is appropriate segregation of duties over expenditure approvals (see Section 3.3)

4. ensure the council's chief financial officer or equivalent approves chief executive officer expenditure and report all expenditure by, or on behalf of, the chief executive officer to the Audit and Risk Committee and/or the council for periodic review (see Section 3.3)

5. document and develop formalised reporting over credit and fuel card use and incorporate, where appropriate, data analytics to identify anomalies (see Sections 3.3 and 3.5).

6. improve fuel card controls by:

  • assigning each fuel card to a specific vehicle or equipment
  • maintaining accurate motor vehicle and fuel card listings
  • updating cardholder names with fuel suppliers when the council reassigns a vehicle and fuel card to another employee
  • collecting fuel transaction data as accurately as possible, including odometer readings
  • having regular, routine processes to monitor fuel card use
  • conducting data analytics over fuel card transactions
  • conducting periodic internal audits on fuel cards (see Sections 3.3 and 3.5).

7. review and, as necessary, revise council policies on the purchase and reimbursement of meals and alcohol considering community perceptions, and require, for transaction approval, clear evidence of the community benefit from this expenditure and appropriate supporting documentation (see Sections 2.2, 3.3, 3.4 and 4.3)

8. ensure that annual reports accurately capture expenses relating to senior management remuneration packages including vehicle contribution amounts (see Section 4.3)

9. ensure all council staff and councillors receive fraud and corruption awareness training at least every two years (see Section 4.4)

10. develop or maintain fraud and corruption incident registers to accurately record suspected incidents of fraud and corruption, their handling, and all relevant supporting documentation (see Section 4.4).

We recommend that Greater Shepparton City Council, Strathbogie Shire Council, and Wyndham City Council:

11. publish councillor expenses for the 2017–18 year on their websites immediately and ensure their 2018–19 annual reports comply with Local Government (Planning and Reporting) Regulations 2014 (see Section 2.3).

We recommend that Strathbogie Shire Council:

12. cease all sales and the provision of vehicles to council staff as part of exit packages (see Section 4.3).

Responses to recommendations

We have consulted with Shepparton, Strathbogie, Wellington and Wyndham and considered their views when reaching our audit conclusions. As required by section 16(3) of the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments. We also provided a copy of the report to the Department of Premier and Cabinet.

The following is a summary of those responses. The full responses are included in Appendix A.

All four councils accepted the recommendations addressed to them. The full responses are included in Appendix A.

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