Results of 2017–18 Audits: Local Government

Tabled: 19 December 2018

2 Results of audits

Councils and their related entities prepare an annual financial report, and councils also prepare a performance statement annually.

The financial report shows financial performance and position, and is prepared in line with relevant Australian Accounting Standards and applicable legislation. The performance statement outlines a council's performance against performance indicators set by the Minister for Local Government.

We audit both the financial reports and the performance statements.

2.1 Conclusion

The financial reports and performance statements of the 79 councils, and financial reports of the 10 regional library corporations and 15 associated entities are reliable.

At the date of this report, our audit opinion for Procurement Australia (previously MAPS Group Limited), which has 30 September year end, was incomplete.

2.2 Financial report audit opinions

Independent audit opinions add credibility to financial reports and performance statements by providing reasonable assurance that the information reported is accurate and reliable.

A clear audit opinion confirms that the financial report fairly presents the transactions and balances for the reporting period, in keeping with the requirements of relevant Australian Accounting Standards and applicable legislation. A clear audit opinion for the performance statement confirms that the actual results reported are fairly presented and comply with the performance indicators set by the minister.

Figure 2A outlines the status of our 2017–18 financial report and performance statement audits, and the types of opinions we issued to each entity. Appendix B lists the local government entities, type of audit opinion and when they were issued.

Figure 2A
Status of audit opinions issued for 2017–18 financial year


Clear opinions issued

Qualified opinions issued


Financial report audit opinions




Regional library corporations









Performance statement audit opinions




(a) Procurement Australia (previously MAPS Group Limited) has a 30 September balance date—no audit opinion had been issued at the date of this report for the year ending 30 September 2018.

Source: VAGO.

2.3 Quality of financial reporting

Entities that adopt effective financial reporting policies and practices throughout the year should be able to produce accurate and reliable financial reports in a timely manner.

The timeliness and accuracy of an entity's financial reports are important attributes. Entities also need to have well planned and managed processes to enable them to efficiently prepare financial reports.

Overall, we found that councils had effective processes and procedures in place to prepare their financial reports and that they presented accurate draft reports for audit.


Timely financial reporting is a critical element of entities' accountability to stakeholders and enables informed decision-making. The later reports are produced and published after year-end, the less useful they become.

Councils are required to submit their financial reports and performance statements to the Minister for Local Government and have them certified by 30 September each year. Figure 2B shows when councils' reports were certified in 2017 and 2018.

Figure 2B
Timeliness of financial reporting by councils

Graph showing when councils' reports were certified in 2017 and 2018.

Note: The 2017 certification date for Central Goldfields Shire Council has been omitted from this figure as it received an extension from the minister until 30 November 2017.

Source: VAGO.

Shell accounts are a set of financial reports and performance statements prepared by management prior to the balance date.

These assist with planning the structure and contents of the actual financial report and performance statement.

All councils met the statutory deadline in 2018, consistent with 2017. There was a small decline in the median time taken to certify the reports compared to last year. We observed that 39 councils took 14 or more days to certify their reports after audit clearance had been provided (compared to 32 in 2016–17). Overall, on average, councils took 13 days to certify their reports in 2017–18, consistent with the prior year. Further improvements to reporting time lines could be made by:

  • bringing forward the council certification meeting date, as VAGO cleared several reports and they waited for some time for signatures
  • conducting a detailed review over the accuracy of property, plant and equipment balances before 30 June
  • councils' preparing and reviewing their shell accounts before they are audited.


The number and size of errors we find are direct measures of the accuracy of draft financial report that we audit. Ideally, there should be no errors or adjustments resulting from an audit.

Material errors are significant misstatements or omissions of information that may influence a user's decision making.

When we find material errors during our audit, we bring them to management's attention for correction. Entities must correct material errors before we can issue a clear opinion. While some errors may appear immaterial in isolation, a series of minor errors when considered together may have a material impact on the entity's financial report. Management can decide whether to adjust errors that are not material.

During our financial audits, we identified a number of financial transaction, balance, and disclosure errors. Figure 2C summarises our findings.

Figure 2C
Common adjustments identified across the 2017–18 reporting period


Dollar adjustments

Overall, we identified 155 financial adjustments across the 79 councils totalling $307.7 million. Common adjustments included:

  • incorrectly accounting for assets owned or disposed by councils
  • errors in the preparation of employee annual and long service leave calculations
  • recognition and classification errors in the calculation of landfill provisions
  • incorrectly classifying term deposits.

Disclosure adjustments

Common financial statement disclosure adjustments identified related to:

  • errors in preparing and classifying capital and operating commitments
  • errors in the accuracy of the disclosures relating to the remuneration of responsible persons and key management personnel.

Source: VAGO.

2.4 Performance statements

Generally, councils prepare and finalise their performance statements concurrently with their financial reports. All councils certified their performance report on the same day as their financial report.

The Local Government Performance Reporting Framework (LGPRF) issued by LGV outlines the requirements for councils' performance statements. Our analysis of the performance indicators reported in performance statements identified that the errors we detect are most likely to relate to:

  • statutory planning—council planning decisions upheld by the Victorian Civil and Administrative Tribunal (VCAT)
  • food safety—critical and major noncompliance outcome notifications
  • waste collection—kerbside collection waste diverted from landfill.

These errors generally arose from using and classifying data incorrectly when calculating performance indicators.

Given performance reporting is a key measure of council transparency, accountability and performance, councils need to do more to make sure the performance statements they submit to us for auditing are accurate and timely.

While councils are required to explain significant variations in performance indicators in comparison to prior years, in our view, council performance reporting would be enhanced if:

  • annual targets were included in performance statements to assist management and users to understand what councils intended to achieve
  • comprehensive explanations of variations between actual results and targets were included to identify where councils could improve their performance.

We are currently undertaking a performance audit that will review LGV and the councils' progress in improving the way they measure and report performance under the LGPRF and use this information to drive improvements. This report is expected to be tabled in Parliament in 2019.

2.5 Financial reporting preparation process

Good financial reporting processes reduce the risk of untimely, inefficient, inaccurate, or unreliable reporting.

The overarching financial reporting process involves people, procedures, policies, data and systems. The better an entity understands and manages these elements, the easier its financial reporting process is at year end. This, in turn, improves the quality and timeliness of financial reports.

Financial reporting process framework

Figure 2D shows there are four key components of the financial reporting process.

Figure 2D
Key components of financial reporting preparation

Infographic describing the key components of financial reporting preparation: Policies and processes, People and organisation, Data and technology, and Internal controls over financial reporting

Source: VAGO.

Financial reporting processes across the local government sector

We asked all 79 councils to complete a comprehensive self-assessment questionnaire about their current processes and systems.

We also created a maturity framework for the four key components in Figure 2D. This framework, shown in Appendix C, summarises the characteristics of each component across different levels of maturity.

What is the current situation?

We collated the results to provide a high-level overview of:

  • how each council has self-assessed their maturity of their financial reporting components
  • where each council desires to be.

The maturity of councils across each component is shown in Figure 2E.

Figure 2E
Results of the financial reporting maturity survey

Four graphs showing the results of the financial reporting maturity survey. The results show how each council has self-assessed their maturity of their financial reporting components and where each council desires to be.

Note: Two councils did not complete the self-assessment questionnaire and were omitted from this analysis.

Source: VAGO.

Figure 2F provides additional details about the common strengths and weaknesses influencing these results.

Figure 2F
Strengths and areas for improvement across the four key components of the financial reporting process


  • Established policies and processes surrounding month-end internal reporting and year-end financial reporting.
  • Internal and year-end financial reporting meets the needs of management.
  • Clarity surrounding the roles and responsibilities of finance staff and competent finance teams.

Areas of improvement

  • Significant amount of time and associated financial resources spent on monthly close and internal reporting activities.
  • Lack of formal ongoing training provided to finance staff in performing month‑end internal reporting activities and year-end financial reporting activities.
  • Limited management reporting and analysis functionality.
  • Failure to prioritise activities based on risk.
  • Absence of proactive data quality reviews.
  • Manual intervention to reconcile data.
  • Manual internal controls over financial reporting.

Source: VAGO.

Key observations

We assessed the policies and processes and the people and organisation components of the local government sector overall as mature.

Councils generally have documented and approved policies and processes in place surrounding month-end and year-end reporting activities. Councils also report that they have competent finance teams, with clearly established roles and responsibilities. These two elements strengthen the effectiveness of monthly and annual financial reporting activities of councils.

The sector assessed itself as intermediate in the areas of data and technology and internal controls over financial reporting. The sector would like to move to a more mature rating within these two areas. Generally, councils hope to achieve this through implementing new technologies and upgrading existing systems.

Developing competency in existing finance technologies is a critical driver to improve financial report quality and efficiency across the sector. This is partially impeded because councils prepare their financial statements using an Excel template provided by LGV, which limits councils' ability to automate the financial statement preparation process.

There is room for improvement in councils' internal controls around financial reporting. The process could be more efficient by reducing reliance on manual controls, introducing risk assessments, and being more proactive in reviewing data quality. These opportunities for improvement are discussed further below.

Opportunities for improvement

Figure 2G details potential initiatives that councils could follow to improve their financial reporting processes, based on the sector's self-assessment responses.

Figure 2G
Observations and opportunities for improvement

Key observation

Why it matters

Potential ways to improve

Policies and processes

Councils are spending an average of ten business days each month completing their monthly management reporting process as well as their financial reporting close process. The size and complexity of councils did not impact this outcome.

The significant time spent by finance teams on month-end close and internal reporting activities limits the capacity for finance teams to allocate appropriate resources to other important activities such as enhancing internal controls over financial reporting and data quality control reviews.

A formal financial statement risk assessment would allow finance teams to prioritise higher-risk activities and minimise efforts on low-risk areas that do not add value to the financial reporting process. By prioritising resources in this manner councils will enhance both the timeliness and quality of existing financial reporting processes.

People and organisation

Councils are not providing formal ongoing training to their finance staff on month-end and year-end reporting activities.

Formal ongoing training is critical to ensuring the continual development of finance staff. It should not be limited to technical financial accounting but should also include the use of technologies that underpin the councils' financial reporting process. A well skilled team that has an in depth understanding of the technologies and reporting capabilities of the finance software used will facilitate a more efficient and effective financial reporting process.

Councils should provide formal ongoing training to their finance staff that supports continual development in both the accounting standard and financial reporting environment as well as in the use of technologies that underpin the councils' financial reporting process. This should reduce the time spent on month‑end financial reporting activities which can then be allocated to proactive data quality reviews.

Data and technology


There are different levels of competence and maturities across the sector in understanding finance technologies capabilities used in the financial reporting process.

Councils do not provide regular training updates to enable their staff to get the most out of their finance systems.

Improving staff knowledge and competency will improve financial reporting process quality and efficiency, as financial data and reports can be more easily extracted by finance teams without the involvement of other internal or external parties.

Councils should provide formal ongoing training to finance staff in the use of finance technologies so that they understand system capabilities and can drive efficiencies in the financial reporting process.

Ensure investment in new finance technologies, or upgrades to existing systems, addresses existing reporting functionality and automation concerns.

Internal controls over financial reporting

Forty-four of the councils surveyed have not assessed the risk of material misstatement within their financial statements.

In addition, 43 councils perform a data quality review only once an issue has been identified.

An increased focus on internal control activities such as conducting financial statement risk assessments, data quality reviews and integrating automated controls over the financial reporting process, will ultimately drive efficiencies that improve the financial reporting outcomes for councils.

Councils should perform a financial statement risk assessment to identify the major risks involved in month-end and year-end reporting processes.

This assessment should also be aligned with the monthly close and internal reporting process—reducing the time spent on low-risk areas in exchange for additional and more frequent reviews of the higher-risk areas. Proactive data quality reviews should be used for high‑risk areas.

Source: VAGO.

Figure 2H summarises the key initiatives that, if undertaken, would strengthen the financial reporting outcomes of councils.

Figure 2H
Successful strengthening of financial reporting outcomes

Infographics showing the key initiatives that can strengthen the financial reporting outcomes of councils

Source: VAGO.

2.6 Differences between sector cohorts in the financial reporting preparation process

We reviewed the survey results across each council cohort and identified clear similarities between certain council cohorts. We have grouped the council cohorts into three categories, and assessed the self-assessment questionnaire on current council processes and systems in the financial reporting process:

  • Category 1: Metropolitan and interface councils.
  • Category 2: Regional city councils.
  • Category 3: Large and small shire councils.

Figure 2I summarises the results of the self-assessment questionnaire based on these categories.

Figure 2I
Financial reporting process sector category analysis

Graph summarising the results of the self-assessment questionnaire based on the categories metropolitan and interface councils, regional city councils and large and small shire councils.

Source: VAGO.

Figure 2J discusses the survey findings at the sector category level.

Figure 2J
Sector category analysis


Desired state

Suggested actions

Metropolitan and interface councils

Areas of strength:

These councils were the most mature group in internal controls over financial reporting due to:

  • automated month-end processes
  • effectively monitored financial reporting controls
  • established basic data quality review processes.

Areas for improvement:

Data and technology was the area of least maturity for councils in this group.

There is a higher level of demand for community services due to high population density for councils in this group.

Different finance systems are used to collect financial data leading to more complex council IT environments.

This presents challenges as between different finance systems may not be easily integrated.

Councils want to improve reporting functionality by upgrading or replacing existing technologies.

  • Councils believe technology upgrades will enable them to achieve a higher level of maturity in several key components of the financial reporting process.

Councils should further automate data between different finance software and provide ongoing formal training to finance staff to build competencies in understanding the capabilities of technologies used in the financial reporting process. The ability to use financial reporting technologies efficiently and effectively will lead to less time and resources spent on monthly close processes and internal reporting activities.

Resources can be redirected to other important activities of the financial reporting process that increase financial reporting quality.

Councils should also ensure proposed system upgrades or replacements will improve efficiencies in automating processes between finance systems and enhance reporting capabilities.

Regional councils

Areas of strength:

These councils were the most mature group in data and technology due to:

  • higher level of automation between finance systems and user understanding of the finance software capabilities
  • fewer complexities in the IT environments
  • staff have a better understanding of the capabilities of the financial software used in the financial reporting process.

Areas for improvement:

  • The area of least maturity was internal controls over financial reporting. This is due to:

  • the absence of formal financial statement risk assessments
  • limited financial data quality control review programs implemented by finance teams.

Councils want to improve existing practices by:

  • increasing finance staff resources
  • reviewing existing processes to identify opportunities for improvement.

Councils should recognise the importance of undertaking a financial statement risk assessment, which would better inform councils about how to allocate resources efficiently and effectively. A more formal assessment could then be made to determine whether additional staff are needed to drive qualitative improvements in the financial reporting process.

Formal proactive data quality reviews targeting high-risk areas should also be established and incorporated into financial reporting policies and procedures. This will enhance the quality of financial data and increase management confidence in the reliability of financial data to support operational and strategic decisions.

Large and small shire councils

Areas for improvement:

This group of councils was the least mature in areas associated with financial statement quality control review.

This is due to:

  • a lack of formalised policies and processes surrounding financial reporting activities
  • limitations of automation between finance software
  • difficulties in attracting staff with preferred skills
  • absence of financial statement risk assessments
  • a lack of access to formal ongoing training.

Councils want to improve existing practices by:

  • formalising policies and processes
  • upgrading or replacing existing technologies.

Councils should establish a financial reporting framework for monthly internal and year-end reporting. A clear financial reporting framework will set expectations and accountability effectively for internal reporting activities strengthening the financial reporting process.

Councils should recognise the importance of financial statement risk assessments. Councils in this group operate in an environment where there are financial and human resource constraints. A formalised risk assessment would allow councils to target areas of most concern and therefore enhance the quality of the financial reporting process.

Councils should provide ongoing formal training to finance staff to build their understanding of the financial reporting technology capabilities. Access to formal ongoing training will further enhance efficiencies in the financial reporting process.

Source: VAGO.

2.7 Key audit themes

Each financial year, as we plan our audit work across the sector, we seek to identify key audit risks. We communicate these key risks in our audit strategy documents, which we present to those charged with governance at each council before the end of the financial year. These risks, if not addressed, may lead to material misstatements in financial reporting.

The similar nature of councils means that there are often common risk themes across the sector.

The main themes influencing the financial reporting of councils in 2017–18 were:

  • the first year of streamlined financial reporting
  • the valuation of non-current physical assets
  • found assets recognised across the sector.

Streamlined financial reporting

Streamlined financial reports aim to:

  • comply with the Australian Accounting Standards and relevant legislation
  • present only relevant information by removing disclosures that are not material in the context of the financial report taken as a whole
  • tailor the presentation of financial information to focus on the objectives, service delivery, financial performance and financial position of the council
  • enhance the report's readability and make it more user friendly.

Consistent with the structure of financial reports in the state of Victoria, substantial changes were made by LGV to streamline the LGMFR.

In this first year of streamlining, we found the readability of the financial reports for the sector has improved. Accounting policies and commentary were grouped with transactions and balances, and the length of financial reports were reduced, making financial reports more understandable and user friendly.

The sector can further customise and improve the usefulness of financial reports by:

  • removing immaterial and irrelevant generic disclosures in the context of an individual council's financial report
  • grouping immaterial items on the financial statements and streamlining the presentation
  • improving disclosures to enhance readability by removing technical language and streamlining commentary where possible.

We encourage the sector to continue to streamline and enhance the relevance of their financial reports, utilising the LGMFR as a starting point for customisation to help users understand the council's financial performance and position.

Physical asset fair value assessments and revaluations

In accordance with AASB 116 Property, Plant and Equipment, councils are required to value their infrastructure, property, plant and equipment assets regularly, to ensure that the reported value of assets is accurate. While councils generally adopt a formal revaluation period of three years, they must assess the impact of revaluation annually, and where there is a material change, they must recognise the change in their asset value.

Across the sector, an asset revaluation increment of $7.0 billion ($5.2 billion in 2016–17) was recognised in 2017–18. Councils' infrastructure, property, plant and equipment were valued at $102.1 billion at 30 June 2018 ($91.2 billion at 30 June 2017).

During 2017–18, our review of infrastructure, property, plant and equipment and the revaluation process identified the following issues across the sector:

  • asset management systems were not complete and accurate resulting in a significant number of found assets
  • there were classification and accounting errors in the underlying calculation of revaluations
  • land assets were duplicated in the revaluation process
  • the basis of revaluation key assumptions was not reported to audit committees.

We have previously reported persistent weaknesses in council asset management practices and recommended that councils improve their asset management frameworks and practices, related policies, and plans.

While there is evidence of incremental progress towards better practice over time, this progress has been relatively slow, and weaknesses persist—see Part 3 for further details.

Found assets

Found assets are physical assets that the council was unaware of, but over which they have control.

A persistent issue across councils is recording 'found' assets, which are assets acquired that have not previously been valued or included in the asset valuation process until the year the asset is identified.

Across the sector, 24 councils identified $314.9 million worth of found assets in 2017–18 (compared to $175.3 million in 2016–17). To account for these found assets, councils have either:

  • made a correction to the opening equity balance
  • recorded them as other income in the 2017–18 financial year.

Figure 2K shows the total value of found assets over the last three years.

Figure 2K
Total value of found assets over the last three years

Graph showing the total value of found assets over the last three years

Source: VAGO.

While councils' infrastructure, property, plant and equipment has been steadily increasing in value, there has been a marked jump in the value and percentage of found assets this year. Out of the $314.9 million of found assets in 2017–18, 75 per cent were identified by three councils. These consisted mostly of infrastructure assets, particularly the recognition of land under roads.

Figure 2L shows the total value of found assets as a percentage of total value of infrastructure, property, plant and equipment.

Figure 2L
Found assets as a percentage of total infrastructure, property, plant and equipment over the last three years

Found assets as a percentage of total infrastructure, property, plant and equipment over the last three years

Source: VAGO.

Establishing and maintaining complete and accurate asset management systems and practices is fundamental to the management of, and financial reporting on, these assets.

Poor asset management can lead to:

  • deteriorating council service levels, and an increased future financial burden
  • negative impacts to the community, including reduced or inadequate services—important public interest matters for ratepayers and residents
  • an inability for councils to effectively meet current and future service demands.

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