Victorian Auditor-General’s report
23 November 2011

Local Government: Results of the 2010–11 Audits 
Audit summary
Background
This report covers the results of our financial audits of 105 entities within the local government sector, consisting 79 councils, 12 regional library corporations (RLCs) and 14 companies, trusts and joint ventures. It informs Parliament about significant issues arising from the audits of financial, standard and performance statements for 2010–11, and augments the assurance provided through audit opinions included in the entities’ annual reports. 
This report comments on the quality and timeliness of financial reporting, the financial sustainability of councils and RLCs, internal audit arrangements and internal controls over procurement and asset management. 
Conclusion
By the statutory date of 30 September 2011, clear audit opinions had been issued on:
·	102 of 105 financial statements
·	89 of 91 standard statements
·	77 of 79 performance statements.
Overall the financial sustainability risk for councils was low, consistent with our 2010 assessment. However, councils face an ongoing challenge to achieve sufficient levels of capital works and to maintain existing assets. 
The financial sustainability risk assessment for regional library corporations is medium. Their high dependence on council contributions and grants however, means they have little or no flexibility in their financial capacity and face ongoing challenges to their financial sustainability.
Councils have yet to fully embrace performance reporting and the non-financial indicators of many are of limited relevance to ratepayers and residents. Councils continue to adopt a compliance approach to performance reporting. As a result, the performance reporting framework has yet to deliver relevant and appropriate information to the community on the quality of services delivered and achievement of outcomes by local councils.
Findings
Audit opinions and the quality of reporting
General purpose financial statements
By the statutory date of 30 September 2011, 102 clear audit opinions had been issued on the general purpose financial statements (103 clear and one qualified issued in 2009–10). A qualified audit opinion was issued on the Buloke Shire Council’s statements after 30 September 2011. In this case, there was material uncertainty about the council’s ability to continue to operate as a going concern.
Two councils and one other entity missed the 30 September 2011 statutory reporting time line, as shown in Figure A.
Figure A
Entities that missed the statutory reporting time line, 2010–11
Entity	Reason 	
Buloke Shire Council	The financial reports were not signed and audit was not completed as at 30 September 2011. 
Audit opinions, including a qualified opinion on the financial statements, were issued on 21 October 2011.	
Mitchell Shire Council	Reporting extension on general purpose financial statement, standard statement and performance statement until 30 November 2011 granted by the Minister for Local Government.	
Streetsahead Cleaning Service	The financial report was signed on 30 September 2011. 
Audit opinion was issued on 3 October 2011.	
Source:	Victorian Auditor-General’s Office.
An audit opinion may draw attention to, or emphasise, matters relevant to the users of an entity’s financial report which do not warrant a qualification. Figure B lists entities issued with an emphasis of matter opinion for 2010–11. 
Figure B
Emphasis of matter audit opinions, 2010–11
Entity	Status	Reason	
Central Highlands Regional Library Corporation	New	The financial report was prepared on a liquidation basis due to the withdrawal of support from the City of Ballarat on 30 June 2011, and the planned winding up of the corporation.	
Melbourne Wholesale Fish Market	New	The financial statements were prepared on a liquidation basis due to entity ceasing operations on 30 June 2011, and the planned winding up of the company.	
Source:	Victorian Auditor-General’s Office.
Special purpose financial reports
Councils and RLCs are required to prepare special purpose financial reports, referred to as ‘standard statements’. Emphasis of matter audit opinion paragraphs are required on these statements to alert users that they differ from statements required under the generally accepted reporting requirements. 
Clear opinions were issued on the 2010–11 standard statements of 78 of 79 councils and all RLCs. One opinion has yet to be signed.
Performance statements
Seventy-six clear and two qualified audit opinions were issued on council performance statements for 2010–11 (77 clear, one qualified and one not prepared in 2009–10). One opinion has yet to be signed. Figure C details the qualified audit opinions. 
Figure C
Qualified audit opinions, 2010–11
Entity	Status	Reason	
Baw Baw Shire	New	Key performance indicators and targets were not included in council’s 2010–11 budget and report for 30 June 2011, as required by the Local Government Act 1989.	
Central Goldfields Shire Council	New	Key performance indicators were not set or reported for every key strategic activity, contravening section 127 of the Local Government Act 1989.	
Source:	Victorian Auditor-General’s Office.
Quality of reporting
Overall, the financial report preparation processes of councils and RLCs were adequate as they produced accurate, complete and reliable information. 
In 2010–11, 102 of 105 entities (97 per cent) achieved the 30 September legislative reporting time frame compared to all in 2009–10.
Financial sustainability
To be financially sustainable, councils and RLCs need to be able to meet current and future expenditure as it falls due. They must also be able to absorb foreseeable changes and financial risks as they materialise. 
Six financial sustainability indicators for 78 councils and five for 12 RLCs were analysed. The results of our analysis of the 90 entities for which statements were audited, are summarised in Figure D.
Figure D
Summary of results of financial risk assessments of councils and 
regional library corporations
	2010–11		2009–10	
Entities	High	Medium	Low	High	Medium	Low	
Councils							
Inner metropolitan	1	–	16	–	1	16	
Outer metropolitan	–	3	11	–	1	13	
Regional city	–	1	10	–	–	11	
Large shire(a)	–	–	14	–	–	15	
Small shire	1	2	19	1	2	19	
Total	2	6	70	1	4	74	
Regional library corporations	3	5	4	2	3	7	
(a) 2010–11 does not include Mitchell Shire as financial statements not complete and not audited.
Note: High = risk of short-term and immediate sustainability concerns, Medium = risk of longer‑term sustainability concerns and Low = no high risk assessments.
Source: Victorian Auditor-General’s Office.
The overall financial sustainability risk level for councils for 2010–11 was low, however the number of councils with a high financial sustainability risk assessment increased to two in 2010–11 (one in 2009–10) and councils rated medium risk increased to six (four in 2009–10).
Analysis of indicators over a five-year period showed that councils maintained a rating of low risk for four indicators. Capital replacement and renewal gap were assessed as medium risk.
The overall financial sustainability risk level for RLCs was medium, however the number assessed as high risk in 2010–11 increased to three (two in 2009–10) and medium risk increased to five (three in 2009–10) while low rated RLCs decreased to four (seven in 2009–10).
Over the four-year period to 2010–11 RLCs maintained a low risk for all indicators except for capital replacement at medium risk and indebtedness at high risk.
RLCs are highly dependent on annual contributions from councils and have little or no flexibility in their financial capacity. The ability for RLCs to repay their short-term financial obligations deteriorated over the four-year period to 2010–11 and they continue to have difficulty maintaining their capital replacement spending at sufficient levels. 
The high dependence of RLCs on councils means that their sustainability can be significantly affected by council decisions about levels of ongoing financial support. During 2010–11 the City of Ballarat withdrew support for the Central Highlands Regional Library Corporation and consequently an emphasis of matter paragraph was issued on the RLC’s financial statements for 2010–11. 
Internal controls
Internal audit
Most councils have a well-developed internal audit function, with 54 per cent assessed as better practice and 39 per cent as developing or developed. However five councils did not have an internal audit function.
The results of our examinations of council internal audit frameworks against better practice showed: 
·	seventy-four councils (94 per cent) had an internal audit function
·	sixty-five (88 per cent) maintained a register to track the implementation of internal audit findings and recommendations
·	seventy-one (96 per cent) had internal audit plans, however 24 (34 per cent) plans were not aligned to council risk registers
·	fifty-five (74 per cent) had an internal audit charter that documented the key accountabilities and expectations of the function, and 48 had reviewed the document in the past three years. 
Procurement
Total council expenditure was $6.36 billion in 2010–11 with $2.42 billion spent on goods and services and $1.56 billion on capital items. 
The results of examinations of internal controls over procurement against the requirements of the Local Government Act 1989 and better practice showed:
·	all councils had procurement policies but sixteen (20 per cent) had not reviewed them annually as required by section 186A(7) of the Local Government Act 1989
·	nine (11 per cent) had not required tender evaluation panel members to complete conflicts of interests declarations prior to evaluating tenders
·	thirteen (16 per cent) did not train tender evaluation panel members to manage conflicts of interests and probity
·	twenty-three per cent of capital works and service contracts examined did not have milestones, time lines and performance measures for assessing performance.
Asset management
In 2010–11 councils controlled fixed assets of $62.7 billion ($60.3 billion in 2009–10) and spent $1.5 billion ($1.4 billion in 2009–10) renewing assets and constructing new assets. 
The maturity of asset management functions varied across councils, but was generally positive with 90 per cent rated as developing or developed, and the remainder as better practice.
Examination of the controls over asset management framework and comparison with better practice showed:
·	thirty-three councils (42 per cent) had not linked their asset management strategy to their policy or strategic resource plan
·	fifty-three (67 per cent) had not linked future service delivery needs with the capacity of assets to meet them on a short-, medium- or long-term basis.
Performance information
Councils had not fully implemented previous recommendations relating to performance reporting. 
Our review of a selection of performance statements identified that a large number of indicators related to key strategy areas are activity-based, focusing on whether an activity is completed rather than the impact of the activity. Councils continued to adopt a ‘compliance-centric’ approach to performance information and used the minimum legislative requirement when preparing performance statements as the maximum disclosure standard.
Recommendations 
Number	Recommendation	Page	
1.	That councils set performance targets and indicators for all key strategic activities in compliance with the Local Government Act 1989.	13	
2.	That councils critically review their performance measures and targets for relevance and appropriateness against Council Plans and the Local Government Act 1989.	48	
3.	That the Department of Planning and Community Development develop minimum standards for the form and content of performance statements.	48	
	That councils:		
4.	establish an internal audit function and align their internal audit plan with the risk register to focus effort on areas of significance	62	
5.	review procurement policies annually as required by the Local Government Act 1989	62	
6.	develop quality and cost standards and desired performance outcomes prior to major procurement exercises	62	
7.	include milestones, key performance measures and time lines in all contracts	62	
8.	educate members of tender evaluation panels on managing conflicts of interests and probity	62	
9.	require tender panel members to complete conflict of interests declarations prior to evaluating tenders	62	
10.	review controls designed in place to determine the validity of purchases made outside of the approved suppliers listing	62	
11.	develop asset management strategies that identify future service delivery requirements, the capacity of assets to meet those needs, maintenance and renewal schedules and links with the overall strategic resource plan.	62	
Submissions and comments received
In addition to progressive engagement during the course of the audit, and in accordance with section 16(3) of the Audit Act 1994, a copy of this report, or relevant extracts from the report, was provided to all councils, regional library corporations and the Department of Planning and Community Development with a request for submissions or comments. 
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix F.
Also included in Appendix G is the City of Greater Dandenong response to my 9 February 2011 Acquittal Report Annex B: Local Government which was erroneously excluded from the published report.