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Local Government Briefingfor Audit, Risk and Improvement Committee Chairs
20 April 2018
AgendaWelcome by the Deputy Auditor-General
Financial Audit report to Parliament
Discussion and comment
BREAK 11.15am
ICAC focus on Local Government
Information Technology risks and focus areas
Performance Audit reports to Parliament
Closing by the Auditor-General
LUNCH 12.30pm
DeputyAuditor-GeneralIan Goodwin
Welcome
Financial Audit Report to ParliamentSteven Martin, Assistant Auditor-General
Council data visualisation
Context for our insights
• Each council has unique characteristics such as size, location, range of services
• A ‘one size fits all approach’ may not be appropriate• Audits process may not detect everything • Internal control environment, risk management procedures
and governance structures may need to differ.
Council spending on services by function
Quality of financial reporting• Modified audit opinions in 2016-17 for three councils• Modified audit opinions in 2015-16 for one council and one
water authority• One emphasis of matter in the unmodified audit opinion • Unmodified opinions for the remaining councils, however• 33 material prior period errors across 22 councils• 39 significant matters in 29 councils.
Quality of financial reporting
0 2 4 6 8 10 12 14 16
Other
Accounting for assets notcontrolled by councils
First time recognition of assets
Valuation methodology for communityland and land under roads did not consider
restrictions on the use of these assets
Number of prior period errors
Material prior period errors identified across the 2016–17 financial audits
Quality of financial reporting
0 2 4 6 8 10 12
Other
Incorrect revenue recognition
Internal control deficiencies
Asset accounting issues
Valuation of communityland and land under roads
Valuation of infrastructure,property, plant and equipment
Number of significant matters
Significant matters reported across the 2016–17 financial audits
Quality of financial reporting
• The financial statements close process can improve• Our report includes better practice guidance• ARIC’s role in reviewing financial statements• OLG needs to release key guidance earlier in the year.
Timeliness of financial reporting
01020304050607080
Num
ber o
f cou
ncils
Week ending
Timeliness of financial reports lodgement with OLG
Number of councils
Early close proceduresComplete infrastructure, property plant and equipment valuations
Prepare proforma financial statements and associated disclosures
Prepare variance analysis and meaningful explanations for movements in financial balances
Perform key account reconciliations
Assess the impact of material, complex and one-off significant transactions
Resolved prior year audit issues
Assess the impact of new and revised accounting standards
Review of financial statements and processes
Financial performance and sustainability
Operating revenue measures
0
10
20
30
40
50
60
Metropolitan Regional Rural County
Num
ber o
f cou
ncils
Operating performance
Councils did not meet benchmark Councils met benchmark
0
10
20
30
40
50
60
Metropolitan Regional Rural County
Num
ber o
f cou
ncils
Own source operating revenue
Councils did not meet benchmark Councils met benchmark
Revenue and expenses
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Metropolitan Regional Rural County
% o
f rev
enue
Sources of council revenue
Rates and annual charges User charges and fees
Grants and contributions Other revenue
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Metropolitan Regional Rural County
% o
f exp
ense
s
Categories of council expenses
Employee benefits Materials and contractsDepreciation and amortisation Other expensesBorrowing costs
Liquidity and working capital measures
Liquidity and working capital measures• All but three councils met the unrestricted current ratio• All but two councils met the debt service cover ratio.
Asset management measures• Asset indicators question whether councils’ spend enough on
renewing and maintaining infrastructure assets• Seventy councils do not meet OLG’s buildings and infrastructure
renewals ratio benchmark• Eighty-four councils do not meet OLG’s infrastructure backlog
ratio benchmark• Seventy-one councils do not meet OLG’s asset maintenance
ratio benchmark• Councils may need to review their asset management plans.
Asset management
Asset management findings
High-risk issues related to:• accuracy of asset registers• restricted assets• asset valuations.
Land assets overstated by $12.1 billion
Councils with no asset management strategy, policy and plan
Asset useful lives
Unrecorded assets
Governance and internal controls
7
1
4
5
10
9
89
70
100
97
153
201
58
55
23
28
55
42
0 50 100 150 200 250
Financial accounting
Payroll
Governance
Purchases and payables
Asset practices
Information technology
Governance and internal control deficiencies reported in management letters
High risk (36) Moderate risk (710) Low risk (261)
Audit committees and internal audit
Other governance matters • Missing or out of date policies and procedures • No legislative compliance framework, policy or register• Opportunities to improve risk management• Council entities.
Discussion, comment,questions
BREAK
Independent Commission Against Corruption (ICAC)
Information Technology –risks and focus areas
IT findings
• Nine high risk issues reported• Findings in two broad areas:
• access to IT systems• IT governance
• Increased risk of fraud and error.
User access controls Effective user access control involves the
following good practice:
Clear policies and procedures.
Formal approval to establish and modify user accounts.
Removal of access when no longer required
Regular review of user access
Password parameters in line with good practice
Clear records of user access
Audits found 107 issues across 56 councils
Staff with access beyond their role requirements
Privileged access controls• Ability to change key system configurations• Wide access to system data, files and accounts• Audits found 86 issues across 64 councils:
• staff and third-party contractors with unmonitored access • no logging and/or review of highly privileged access• sharing of highly privileged user accounts.
User developed applications• Computing applications, tools and processes developed or
managed outside IT administration• There are reasons why these tools are used• Mitigating controls• Audits found:
• councils using spreadsheets without appropriate controls• councils where non-IT staff could modify financial
databases.
IT governance• Audits found:
• councils without an IT strategy and IT operational plan
• councils without an adequate IT security policy
• councils without adequate back up, disaster recovery and business continuity arrangements.
Performance Audit
Our first three performance audits in local governmentThree Topics
• Fraud controlDue for public release in May 2018
• Shared services
Due for public release in June 2018
Reporting on service delivery
Key Findings• Need greater emphasis on reporting
efficiency and effectiveness of services • Report performance over time• Use targets related to service objectives • IP&R Framework could be improved to
support better reporting• Consolidating council reporting to state
agencies would support better reporting.
Reporting on service delivery
Recommendations
OLG should, by mid-2018:• issue additional guidance on good practice in reporting• clearer integration of all reports required by the IP&R Framework• consolidate reporting by councils to state agencies• work with rural councils to develop their reporting capability• define reporting terms to encourage consistency• develop a Performance Management Framework to deliver sector
wide reporting.
Performance audits recently releasedof interest to councils
Performance audit program 2018-19Performance audits underway• Risk management culture and capability• Grants to non-government schools• Regional Assistance Programs• Property asset utilisation • Ausgrid: Unsolicited proposal to acquire 50.4% interest in Ausgrid• Health Roster Benefits Realisation
Performance audit program 2018-19Performance audits underway• Regulation of Waste and Water• Assessing Progress of Premier’s and State Priorities (including
Premier’s Implementation Unit)• Newcastle Urban Transformation and Transport Program• Antisocial behaviour in social housing
Performance audit program 2018-19Performance audits underway• Matching Skills training with market need• Planning for New and Revitalised Communities• Mobile Speed Cameras.
Currently developing our audit program for 2019-20 and 2020-21.
Auditor-GeneralMargaret Crawford
Closing
Better practice and other resourcesAudit Office Better Practice Guides- covering procurement , contract management, governance, fraud control and risk management.https://www.audit.nsw.gov.au/publications/better-practice-guides
Treasury Policies and guidance• TC18-02 NSW Fraud and Corruption Control Policy• TPP17-06 Certifying the effectiveness of internal controls over financial information• TPP 15-03 Internal Audit and Risk Management Policy for NSW Public Sector• TPP 12-03 variance toolkits for risk management
https://www.treasury.nsw.gov.au/documents-resources/documents-library
Better practice and other resourcesLocal Government Victoria Audit Committee Good Practice Guidehttps://www.localgovernment.vic.gov.au/__data/assets/pdf_file/0021/84081/Audit_Committees_Guidelines-A-guide-to-good-practive-for-local-government.pdf