Victorian Auditor-General's report
28 November 2012 
Local Government: Results of the 2011–12 Audits 
Audit summary
This report presents the results of our financial audits of 103 entities within the local government sector comprising 79 councils, 11 regional library corporations (RLCs) and 13 associated entities. It provides a detailed analysis of council financial reporting, performance reporting, financial results, financial sustainability and internal controls. It informs Parliament about significant issues arising from the audits and complements the assurance provided through individual audit opinions included in the entities’ annual reports.
Clear audit opinions were issued on all financial reports and 90 standard statements. An ‘emphasis of matter’ paragraph was included for one entity due to the financial statements being prepared on a liquidation basis.
Clear audit opinions were issued on 79 performance statements for the year. 
Conclusion
Notwithstanding some areas for improvement, Parliament can have confidence in the adequacy of financial and performance reporting and the internal controls of the entities audited.
Financial results and sustainability
The combined operating results for councils deteriorated from a surplus of $1.11 billion in 2010–11 to $1.03 billion in 2011–12. An increase of $672 million in revenue (9 per cent) was offset by an increase of $752 million (12 per cent) in expenses, mainly driven by an increase in employee benefits arising from a $367 million funding call on the local government defined benefit superannuation plan.
The combined operating results of RLCs have also deteriorated from a surplus of $2.16 million in 2010–11 to a deficit of $3.06 million in 2011–12. They continue to rely heavily on council contributions to fund their operations, which represented 80 per cent of revenue. Without this funding, RLCs cannot generate sufficient funds to meet their financial obligations.
Of 79 councils, 73 had a low financial sustainability risk, five had a medium risk, and one was high risk. 
All councils’ results were impacted by the early receipt of two quarterly instalments of grant funding from the Victorian Grants Commission and a funding call made on local government to address a shortfall in the defined benefit superannuation fund.
Internal controls
Overall, councils, RLCs and associated entities’ internal controls were adequate for producing reliable, accurate and timely financial reports. Nevertheless, a number of common areas for improvement were identified. Councils, RLCs and associated entities require adequate internal controls for financial reporting purposes to assist with the efficiency and effectiveness of their operations and to comply with relevant laws and regulations. As part of our annual assessment of internal controls we focused on controls for budget development and management and outsourcing activities.
Budgets of all councils were aligned with the four-year term of the elected council and the council’s four-year strategic objectives. However, 92 per cent of councils did not acquit actual performance against the budget or the strategic objectives set and 47 per cent did not have longer-term budgets beyond 10 years.
Seventy-seven per cent of councils did not demonstrate links between their operational and capital budgets, and minimal consideration was given to asset depreciation or the ageing of existing assets in order to achieve an appropriate balance between maintaining older assets and investing in new assets. 
Recommendations
Number	Recommendation	Page	
1.	That councils should further refine their financial reporting processes by strengthening the review and assurance procedures over the accuracy of data needed for financial report preparation.	10	
2.	That the Department of Planning and Community Development should continue its work in developing regulations that establish the minimum standards for the form and content of performance statements.	14	
	That councils should:		
3.	critically review their strategic and service objectives so that they are clearly expressed, aligned and measurable	14	
4.	critically review the performance information in their annual reports so that it is relevant, balanced, appropriate and clearly aligned with their objectives	14	
5.	develop budget management policies and procedures to encourage consistency of practice	50	
6.	prepare and align financial and strategic budgets beyond the elected council’s four-year term to inform delivery of longer-term outcomes, and consideration of timely asset replacement 	50	
7.	periodically review and acquit actual performance against the council’s budget and strategic objectives to inform budget management decisions and avoidance of overruns	50	
8.	review the link and impact between their operational and capital works needs when preparing the budget so that sufficient provisions are made for maintenance and renewal of assets	50	
9.	obtain independent assessments of the assumptions underpinning budgets to improve the soundness of budgeting outcomes and practices	50	
10.	provide a reporting mechanism for councillors to regularly monitor actual council performance against set budget	50	
11.	develop and maintain outsourcing policies and procedures that:
·	mandate the preparation of robust business cases and require rigorous assessments of procurement options including outsourcing or insourcing any service
·	mandate assessment of the alignment of outsourced arrangement with Best Value Principles
·	address reporting disclosure matters	50	
12.	develop formulated and tested contingencies for delivery of critical outsourced services in the event of provider failure	50	
13.	identify and register risks inherent in outsourcing and develop mitigation strategies and monitor progress in managing those risks.	50	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 relevant extracts from the report were provided to all councils 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 G.