Local Government: 2015–16 Audit Snapshot

Tabled: 24 November 2016

Audit overview

In this report, we detail matters arising from the 2015–16 financial and performance report audits of the 79 councils, 11 regional library corporations and 14 associated entities that make up the local government sector. We also assess the sector's financial performance during 2015–16 and its financial sustainability as at 30 June 2016.

Conclusion

At 30 June 2016, local governments collectively generated a net surplus for the year of $1.6 billion. We assess the sector generally as having relatively low financial sustainability risks. However, this is not uniform. Financial sustainability issues are emerging for the cohort of 19 small shire councils. Declining revenues are forecasted for this cohort over the next three years, while expenditure is expected to remain consistent.

Asset valuation processes across the sector require more attention. Some councils do not:

  • provide complete and accurate asset registers to their valuation experts for review
  • have sufficient understanding to review and challenge their valuers' assessments
  • have appropriate governance measures to identify and mitigate risks associated with the valuation process.

Findings

Financial audit outcomes

We issued clear audit opinions for the 2015–16 financial and performance statements of the 79 councils in the local government sector.

We reviewed the internal control framework of each council as part of our financial audits, and reported on 211 new internal control weaknesses that require attention. Councils have not taken remedial action to rectify similar issues we raised in prior audits—45 per cent of these issues have not been resolved at 30 June 2016. The weaknesses we have identified have the potential to result in material frauds or errors going undetected. They need to be resolved in a more timely way.

Financial performance

The local government sector generated a combined net surplus of $1.6 billion for the 2015–16 financial year. Most of this was contributed by the nine interface councils[1] from their cash and in-kind developer contributions, both of which are recognised as revenue when they are handed over to councils. These interface councils recorded $692.4 million in contributions in 2015–16—$519.5 million in assets and $172.9 million in cash—a 54.7 per cent increase on the prior year.

While in-kind developer contributions are recognised as revenue when received, councils then have an ongoing obligation to maintain the assets they receive and also to spend developers' cash contributions on community assets.

At the sector level, while developer contributions were up, payments of Commonwealth financial assistance grants to councils were down compared to the prior year. However, this was largely a timing difference. The first tranche of the 2015–16 grant was paid early and therefore was recognised during 2014–15, so only half the 2015–16 grant was recognised as revenue in 2015–16.

Financial position

At 30 June 2016, the local government sector was responsible for $84.6 billion of fixed assets. Councils control a large variety of fixed assets to enable them to deliver services to their communities—such as land, buildings, roads and drainage. Overall, we were satisfied that the value of fixed assets reported by the sector at 30 June 2016 is materially accurate.

However, not all councils have complete underlying data about their assets. In 2015–16, 31 councils found $149.3 million of assets that they had not known about or recorded. Our case studies illustrate that this is a recurring issue.

By improving their asset data, and asset valuation frameworks, councils will be able to use this information for purposes other than financial reporting. In particular, this would provide additional details for councils to consider as part of their asset maintenance and capital works planning.

At 30 June 2016, the local government sector held $3.4 billion in cash and investment assets, and $1.2 billion in interest-bearing liabilities. The sector has a low level of net debt.

Financial sustainability

Overall, we assessed the local government sector as having a relatively low financially sustainable risk at 30 June 2016. When assessed against six financial sustainability risk ratios, the sector received positive ratings for both short- and long-term indicators of financial sustainability risk, but this was not a uniform result.

Small shire councils

Our financial sustainability analysis of the five council cohorts indicated that, taken collectively, the 19 small shire councils have emerging financial sustainability risks.

This cohort generated a combined net deficit of $0.1 million for the 2015–16 financial year, $67.3 million less than last year. This related directly to the timing of the financial assistance grants. This cohort did not collect other revenue to counteract this impact, unlike other cohorts within the sector. This resulted in increased financial sustainability risks for the small shire council cohort.

Looking ahead, the small shire council cohort is expecting to experience a decline in capital grant revenue over the next three financial years. From our review of the cohort councils' unaudited budgets, this loss of revenue—combined with a steady level of expenditure—will have the following impact:

  • a decline in the net result of the cohort
  • a reduction of funds available for investment in property, plant and equipment—with the number of councils within this cohort forecast to spend less than depreciation on their assets over each of the three financial years.

Recommendations

We recommend that councils:

  1. promptly address matters raised in this and previous years' audits to prevent their potential reoccurrence and rectify any weaknesses in their control environment to mitigate the risk of their financial statements having material errors (see Part 2)
  2. review their asset valuation frameworks and incorporate better practice elements as required (see Part 4)
  3. ensure the asset register is accurate and reconciled with asset management systems (see Part 4).

Responses to recommendations

We have consulted with all local councils and the Department of Environment, Land, Water & Planning, and we 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, or relevant extracts, to those agencies and asked for their submissions and comments.

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

The Department of Environment, Land, Water & Planning responded, noting that 79 local governments were issued a clear opinion on their financial statements and performance reports for 2015–16. Local Government Victoria (LGV) is to begin discussions to decide how councils may share their information from management letters with the Minister for Local Government and LGV. LGV will reissue its Asset Management Better Practice Guidelines and continue to work with the sector to improve asset management practices. In conjunction with Regional Development Victoria, LGV will work with rural councils to assist in developing strategies to strengthen the financial sustainability of small rural councils.

Footnote
[1] Interface councils are the nine municipalities that form a ring around metropolitan Melbourne. See Appendix B.

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