Results of 2017–18 Audits: Local Government

Tabled: 19 December 2018

Report overview

The Victorian local government sector consists of 79 councils, 10 regional library corporations and 16 associated entities. Each year, we audit the finances of these 105 entities.

This report outlines the results of our 2017–18 audits of the financial reports and performance statements of these entities. We also analyse the financial results and outcomes of the sector.

Findings

Results of audits

Financial reports

We issued 104 clear audit opinions for all councils, regional library corporations and associated entities with a 30 June 2018 financial year end. We have yet to issue an opinion on Procurement Australia (previously MAPS Group Limited), which has a 30 September balance date.

While all councils met their statutory reporting deadline, there was a slight decline in the median time taken to certify their financial reports compared to last year. This result could be significantly improved by bringing forward the date councils meet to adopt their financial report. We observed a time lag between reports cleared by audit and this meeting at some councils.

Councils generally have adequate documented policies and processes, and competent finance teams to report on their activities. Nevertheless, many councils in the sector would gain efficiencies from upgrading their IT systems or implementing new systems to increase automation and data quality monitoring, as well as to reduce their reliance on manual spreadsheets. These system upgrades will enhance the quality and efficiency of the financial reporting process.

Performance statements

We issued clear audit opinions on the performance statements of all 79 councils, for the financial year ended 30 June 2018.

While councils explain significant variations in performance indicators in comparison to prior years, performance statement reporting could be enhanced by defining and including key targets to allow management and other report users to understand which areas need improvement.

Streamlined financial reporting

The readability of the financial reports for the sector improved in 2017–18, with the implementation of the Local Government Model Financial Report (LGMFR). We encourage the sector to continue to streamline and enhance the relevance of the content in their financial reports, utilising the LGMFR as a starting point for customisation.

Physical asset fair value assessments and revaluations

The sector revalued its non-current asset base upwards by $7.0 billion in 2017–18 ($5.2 billion in 2016–17).

We have previously reported weaknesses in council asset management and financial reporting practices, and continue to identify persistent issues relating to the:

  • completeness and accuracy of information contained in asset management systems
  • classification and accounting errors in the underlying calculation of revaluations.

While we note incremental improvements this year, councils still need to prioritise improving their asset management frameworks, practices, related policies, and plans.

Found assets

In 2017–18, 24 councils identified $314.9 million of 'found' assets—that is, assets councils already own that have not been recorded (compared to 29 councils and $175.3 million in found assets in 2016–17).

This recurring issue for the sector needs to be resolved by placing greater emphasis on recording assets when they are acquired, especially those physical assets contributed to councils by developers.

Recycling domestic waste

Based on 2018–19 council budgets, there is an expected average increase of approximately 14 per cent in the annual waste charge levied to residents compared to 2017–18. The charge increase is in direct response to additional costs for councils to manage kerbside collection of household recyclable waste.

Councils need to consider longer term solutions that will allow recycling services to continue without significant costs to residents.

Internal controls

Overall, we found that internal control was adequate to ensure reliable financial reporting. However, some important internal controls—mostly relating to infrastructure, property, plant and equipment; and expenditure and accounts payable—can be strengthened to further reduce the risk of fraud and error.

We identified 121 new medium- and high-risk internal control weaknesses and financial reporting issues in 2017–18 (compared to 110 newly identified issues in 2016–17).

During the year, councils resolved 81 per cent of the 359 extreme-, high-, and medium-risk issues that we raised with them in previous years (61 per cent of prior year issues were resolved in 2016–17). While an improvement, councils could do more to address outstanding matters within recommended, agreed time frames.

Financial sustainability

As a sector, the overall risk to its financial sustainability is low—particularly in the short to medium term.

Most councils demonstrated strong financial performance and a sustainable financial position, but we note that rural and regional councils continue to be relatively more susceptible to risks to their financial sustainability. This is in part because of their lack of flexibility to generate significantly more own-sourced revenue to offset their increasing operating costs.

Longer term, we observe declining asset renewal and maintenance indicators, which can lead to increased asset management costs or lower service levels that would be borne disproportionately by future ratepayers.

Inter-generational equity issues highlight the need for councils to focus on the long-term sustainability of their existing revenue and expenditure policy settings, and approaches to asset maintenance and renewal.

Recommendations

We recommend Local Government Victoria:

1. introduce the requirement for councils to set and report achievement against targets for each of the performance indicators presented in councils' performance statements (see Section 2.4).

We recommend councils:

2. explore longer-term solutions to continue recycling services without significantly affecting the cost of living for the community (see Section 1.3)

3. continue to streamline their financial reports and make them more relevant, to help users understand the councils' financial position and performance (see Section 2.7)

4. improve financial reporting process efficiencies by reducing the reliance on manual controls, introducing risk assessments, and actively monitoring and reviewing data quality (see Section 2.5)

5. resolve prior year internal control issues and financial reporting deficiencies within the recommended time frames (see Section 3.2)

6. develop asset management strategies through consultation with the community and prioritise asset maintenance and renewal while making sure they are financially sustainable in the long term (see Section 4.2).

Responses to recommendations

We consulted with the Department of Environment, Land, Water and Planning (DELWP) and the councils named in this report, 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 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 (DPC).

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

DELWP notes our findings and supports in principal the recommendations in the report. DELWP plans to write to all mayors and council chief executive officers recommending that they review the report findings and address any internal control issues relevant to their council in a timely manner.

Bass Coast Shire Council and Campaspe Shire Council have also provided an update regarding their management letter issues.

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