Fraud and Corruption Control—Local Government

Tabled: 19 June 2019

1 Audit context

Local government employees and elected councillors make decisions and perform functions that affect the lives and interests of all Victorians.

The Independent Broad-based Anti-corruption Commission (IBAC) has repeatedly highlighted the need for agencies to develop a culture of integrity. A strong integrity culture can play a vital role in preventing, detecting and responding to fraud and corruption. Leaders must set the tone and ensure expectations are clear and that there are consequences for non-compliance.

Under the Act, councils have a duty to do all things necessary to:

  • ensure that all money spent by the council is correctly used and properly authorised
  • develop and maintain adequate internal control systems.

Ineffective controls can indicate that an organisation does not take fraud and corruption risks seriously and can create an environment where fraud and corruption can occur and go undetected. The financial amounts in question do not need to be significant to reduce public trust.

Transparency is crucial to maintaining public trust. In particular, discretionary spending presents perception risks to the sector, and should be able to withstand public scrutiny. Councils can jeopardise community confidence if they fail to adequately record and justify their spending decisions. In addition, if there is inconsistency between a council's stated policies and procedures and what it does in practice, this can raise suspicions about council expenditure and how well it is preventing fraud and corruption. If financial losses occur due to fraud and corruption, it can impact a council's ability to meet the needs of its community.

1.1 What is fraud and corruption?

Fraud is dishonest activity involving deception that causes actual or potential financial loss. Examples of fraud include:

  • theft of money or property
  • falsely claiming to hold qualifications
  • false invoicing for goods or services not delivered, or inflating the value of goods and services
  • theft of intellectual property or confidential information
  • falsifying an entity's financial statements to obtain an improper or financial benefit
  • misuse of position to gain financial advantage.

Corruption is dishonest activity in which employees act against the interests of their employer and abuse their position to achieve personal gain or advantage for themselves or others. Examples of corruption include:

  • payment or receipt of bribes
  • a serious conflict of interest that is not managed and may influence a decision
  • nepotism, where a person is appointed to a role because of their existing relationships, rather than merit
  • manipulation of procurement processes to favour one tenderer over others
  • gifts or entertainment intended to achieve a specific outcome in breach of an agency's policies.
Losses resulting from fraud and corruption

It is difficult to measure total losses due to fraud and corruption. As well as financial losses, there are indirect losses, including productivity losses and damage to the community's trust in the local government sector.

The Australian Institute of Criminology (AIC) ranks fraud as the most costly type of crime. While there are no precise figures, AIC estimates that fraud costs the Australian economy $8.5 billion per year. Between October 2016 and September 2017, the total value of reported frauds exceeding $50 000 brought before Australian courts was $482 million.

At present, there is no requirement for councils to report losses due to fraud and corruption to the Victorian Auditor-General's Office (VAGO), as required of state government departments and authorities under the Standing Directions of the Minister for Finance 2016. Councils are also not required to report financial losses to LGI. However, council CEOs need to report suspected corruption to IBAC.

1.2 Legislation, policy and guidance

In May 2018, the Minister introduced the Local Government Bill 2018 into Parliament. The government intends for the bill to repeal and replace the Act with a modern, principle-based legislative framework. The proposed bill requires Audit and Risk Committees (ARC) to 'monitor and provide advice on risk management and fraud prevention systems and controls'. The proposed bill did not pass during the previous Parliamentary term and so has lapsed.

Figure 1A provides an overview of key legislative and accounting standard requirements and guidance material relevant to councils when developing their fraud and corruption strategies and controls.

Figure 1A
Key legislative and the Accounting Standard requirements and guidance material

Instrument

Requirements / Guidance

Local Government Act 1989

Mandatory compliance

The Act describes the roles, functions and powers of councils and includes provisions relevant to fraud and corruption control, including conflict of interest, the role of audit committees, councillor reimbursements, and codes of conduct for council staff and councillors.

Local Government (Planning and Reporting) Regulations 2014

Mandatory compliance

The Regulations require councils to document in their annual report expenses for councillors in five categories.

Local Government (General) Regulations 2015

Mandatory compliance

The Local Government (General) Regulations 2015 require councils to make specific documents available for public inspection, including a document containing details of overseas or interstate travel undertaken by a councillor or council staff member within the previous 12 months.

Protected Disclosure Act 2012 and Independent Broad-based Anti-corruption Commission Act 2011

Mandatory compliance

The purpose of the Protected Disclosure Act 2012 is to encourage and facilitate disclosures of improper conduct by public officers, public bodies and others, and to provide protections for people who make disclosures.

If a body can receive protected disclosures, it must have effective procedures to facilitate the making of disclosures, including notifications to IBAC.

The Independent Broad-based Anti-corruption Commission Act 2011 requires all relevant principal officers of public-sector bodies, which includes council CEOs, to notify IBAC of any matter they suspect on reasonable grounds involves corrupt conduct.

Australian Accounting Standards Board AASB 124 Related Party Disclosures

Mandatory compliance

The objective of the Accounting Standard is to ensure that financial statements contain disclosures to draw attention to the possibility that an entity's financial position may have been affected by the existence of transactions with related parties.

Since July 2016, certain council staff and councillors are required to, for example, declare if they or close family members control or jointly control a business, club, association or sporting group that transacts or has commitments with the council.

The Accounting Standard also requires that local councils note in their annual report total remuneration for key management personnel, including non-financial benefits, such as motor vehicles.

Australian Standard 8001–2008 Fraud and Corruption Control

Better practice

The Australian Standard 8001–2008 Fraud and Corruption Control (the Australian Standard) provides guidance on controlling fraud and corruption within an entity. The Australian Standard views fraud and corruption control as 'a holistic concept involving implementation and continuous monitoring and improvement across three key themes—prevention, detection and response'.

IBAC, LGI, VAGO and Victorian Ombudsman publications

Better practice

IBAC, LGI, VAGO and Victorian Ombudsman (VO) investigation and audit reports, reviews, media releases and resources can assist the local government sector.

Source: VAGO.

Fraud and corruption controls

Fraud and corruption control frameworks should include controls that address the three key areas of prevention, detection and response, as outlined in Figure 1B.

Figure 1B
Fraud and corruption frameworks

The three key areas are prevent, detect and respond.

Source: VAGO.

1.3 Agencies and their responsibilities

Local councils

The Constitution of Victoria recognises local government as a separate tier of government. Residents and ratepayers elect councillors to govern councils, and the councillors appoint a CEO, who manages the council's operations. While administered under the Act, all 79 councils in Victoria operate autonomously and are accountable to ratepayers and residents.

The local government sector is primarily funded though rates and charges, as well as government grants, to deliver services to the local community. In the 2017–18 financial year, our financial audit found that Victorian councils recorded revenue of $10.7 billion. Rates and charges revenue was $5.7 billion, making up over 50 per cent of total revenue. The second-largest revenue stream for councils was government grants and contributions, totalling $3.15 billion.

Figure 1C shows the populations in the audited councils' municipalities and the audited councils' incomes for 2017–18.

Figure 1C
Audited councils' populations and incomes for 2017–18

Council

Population

Income for 2017–18

Wyndham

250 186

$581 856 000

Shepparton

65 593

$142 810 112

Wellington

43 747

$99 062 112

Strathbogie

10 445

$32 548 270

Source: VAGO, based on council annual reports for 2017–18.

Local Government Inspectorate

LGI is the dedicated integrity agency for local government in Victoria. LGI investigates offences under the Act and monitors governance and compliance with the Act in Victorian councils.

1.4 Why this audit is important

Fraud and corruption erode public trust in local government, disrupt business continuity, deter potential suppliers, reduce the quality and effectiveness of services, and threaten a council's financial stability.

A recent investigation by LGI resulted in criminal charges against a council CEO relating to the use of a council credit card for personal expenses. The CEO had bought items on their council credit card and falsely claimed they were for council business. The court convicted the CEO in December 2018 and ordered them to pay $26 000 in fines and $10 000 towards the prosecution's legal costs.

Following a separate LGI investigation, in July 2018 a court convicted and fined a councillor for their failure to submit Ordinary Returns by the prescribed date and disclose all companies in which they had an interest, as required by the Act. The court fined the councillor $26 000, plus $15 000 in legal costs. The County Court Judge noted that LGI had issued the councillor with a previous warning and described the councillor's offending as 'persistent'.

From December 2016, when IBAC introduced mandatory reporting of suspected corrupt conduct by relevant principal officers, including council CEOs, to November 2017, 44 per cent of reports to IBAC have concerned local councils.

1.5 What this audit examined and how

This audit examined whether councils have well-designed fraud and corruption controls that operate as intended. We primarily focused on expenditure and conflict of interest processes for senior council staff and councillors.

We assessed if councillor and senior staff credit and fuel card use, and reimbursements, were valid and in accordance with legislative and policy requirements. We also considered if the audited councils responded effectively when they detected non-compliant expenditure or reimbursements.

We also assessed if controls to identify and manage conflicts of interest for senior council staff and councillors were effective and operating as intended. This included assessing the completeness of interest disclosures, required under the Act, and Related Party Disclosures, required under the Accounting Standard.

We audited four councils—Shepparton, Strathbogie, Wellington and Wyndham. We selected the four councils through:

  • discussions with other integrity agencies to ensure we would not be compromising any active investigations
  • ensuring a selection of different sized councils and a spread across metropolitan and rural councils.

We also consulted with Local Government Victoria (LGV), which provides policy advice to the Minister and oversees the administration of the Act, and LGI in the conduct of this audit.

This report includes adverse comments about the current Strathbogie and Wyndham CEOs. Section 20(2) of the Audit Act 1994 requires us to provide them with a reasonable opportunity to respond to the draft report. As a result, we provided draft reports to both of these CEOs on 18 April 2019 and 28 May 2019. Neither CEO provided a response to these matters in their individual capacity. The Acting Auditor-General has considered the councils' responses contained in Appendix A in making the decision to include the adverse comments in the report.

In accordance with section 20(3) of the Audit Act 1994, any other persons who are named from the information in this report are not the subject of any adverse comment or opinion.

We conducted our audit in accordance with section 15 of the Audit Act 1994 and ASAE 3500 Performance Engagements. We complied with the independence and other relevant ethical requirements related to assurance engagements. The cost of this audit was $675 000.

1.6 Report structure

The remainder of this report is structured as follows:

  • Part 2 examines fraud and corruption controls over councillor entitlements and expenditure.
  • Part 3 examines fraud and corruption controls over staff expenditure.
  • Part 4 examines the maintenance of public trust.

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