This Audit Results Report contains findings from the annual financial audits of the local governments and regional councils that we audited for the 2018-19 financial year.

Following proclamation of the Local Government Amendment (Auditing) Act 2017 (Amendment Act), the Auditor General has been progressively assuming responsibility for the audits of the annual financial reports of local government entities. This report covers the annual financial audits of 112 entities, with the remaining 36 due to transition to the Auditor General by 2021.

Under the Amendment Act, the Auditor General also assumed responsibility for performance audits of the local government sector. We report to Parliament on those audits when they are completed.

Key findings

• We issued auditor’s reports for 106 entities by 3 March 2020 for the 2018-19 financial year. 
• All but 5 auditor’s reports included clear (unqualified) audit opinions on the financial reports. However, we reported 93 material matters of non-compliance with the Local Government Act 1995, Local Government (Financial Management) Regulations 1996, or other written law in 48 of our auditor’s reports. If not addressed, these non‑compliance matters may result in significant financial loss, inefficiency, financial misreporting or fraud. 
• At 13 entities, required related party disclosures were not made by all councillors and other key management personnel. Three entities currently do not have a related party declarations policy in place and at some entities there were several non‑disclosures. 
• In addition to material matters of non-compliance reported in auditor’s reports, we reported the following to entity management and the Minister for Local Government:
  • 766 financial management control weaknesses at 104 entities, of which 74% related to expenditure, financial management, payroll and human resources, and revenue. We considered 85% to be significant or moderate risk if not resolved in the short term
  • 202 information system (IS) control weaknesses at 38 entities. This includes 125 weaknesses identified at 9 of the 10 entities subjected to a specific IS audit. 
• The audits of 16 entities were not completed by 31 December 2019, mainly because the entities were still investigating or correcting errors in their financial reports.
• The quality of financial reports submitted for audit varied significantly across entities, from good to very poor, including some that did not balance and required significant levels of additional audit work. 
• During our second year of performing annual financial audits in the local government sector, we have made further general observations and included these in the report, with a view to minimising the cost of financial reporting and auditing in the future. These relate mainly to:
  • opportunities to reduce the financial reporting burden on small and medium sized entities, as the quantity of detail that is being reported is onerous and exceeds that reported by most WA State government entities 
  • concern that there are reporting inconsistencies in the sector as a variety of valuation methodologies are being used for property and infrastructure
  • the costs and benefits of requiring all asset classes to be valued. 
• We have also commented on the low proportion of entities that have an internal audit function and continue to identify significant opportunities to increase the effectiveness of audit committees and enhance auditor/entity communications. 
• Entities are preparing for upcoming changes to Australian Accounting Standards on revenue, income and leases for 2019-20, and we have recommended this be completed by 30 June 2020. 

Recommendations

1. Local government entities should ensure they maintain the integrity of their financial control environment by:
   • periodically reviewing and updating all financial, asset, human resources, governance, information systems and other management policies and procedures, and communicating these to staff
   • conducting ongoing reviews and improvement of internal control systems in response to regular risk assessments
   • regularly monitoring compliance with relevant legislation
   • promptly addressing control weaknesses brought to their attention by our audits, and other audit and review mechanisms. 
2. Entities should ensure that reports from their valuers clearly explain key aspects of the valuations, and that management has a comprehensive understanding of the reports. 
3. Management should annually review the estimated useful lives of assets used for calculating depreciation, if necessary in consultation with their valuers or other experts. In addition, for greater consistency across entities, the Department of Local Government, Sport and Cultural Industries (DLGSC) should review its guidance regarding potential ranges for useful lives of assets, and entities should consider the guidance when doing their annual reviews. 
4. Entities who have not yet done so, should implement the recommendations of our local government position paper number 1 ‘Accounting for work bonds, building bonds and hire bonds’. 
5. DLGSC should consider extending existing declaration processes to include annual related party declarations for councillors and key management personnel that assist compliance with Australian Accounting Standard AASB 124 and that are fit-for-purpose to the local government environment. 
6. Local government entities should, where necessary, seek advice in advance of year end if uncertain about appropriate accounting treatments. 
7. To improve the quality of financial reports and achieve greater consistency across entities, DLGSC should consider providing an accounting advice helpdesk to the local government sector. 
8. DLGSC should re-assess the amount of detail required to be included in annual financial reports, in particular for small and medium sized entities. 
9. DLGSC should re-assess the potential advantages and disadvantages if smaller local government entities reported some asset classes such as plant and equipment using the cost model, rather than periodically re-valuing those assets.
10. Entities and DLGSC should monitor the progress of the Australian Accounting Standards Board (AASB) and the International Public Sector Accounting Standards Board (IPSASB) public sector fair value projects relating to the valuation of assets. 
11. DLGSC should consider facilitating a shared internal audit service for the local government sector, as a service available to small and medium entities who do not have their own internal audit function.
12. To facilitate timely preparation of annual financial reports, and to minimise the additional audit costs associated with Australian Accounting Standards on revenue, income and leases (AASB 15, AASB 1058 and AASB 16), entities should complete preparations for those new standards by 30 June 2020.