The annual financial audit is focussed on providing assurance over a LG’s annual financial report. During the audit we also make audit findings regarding compliance and financial and information system controls.
In this first year of auditing local government we have made some initial observations regarding opportunities for improving audit outcomes which would contribute to improved governance, financial management and performance for enhanced community satisfaction and confidence in LGs. It is important to note that each of the following issues was observed, with differing frequency across the LGs we audited.
Compliance vs better practice
At some LGs we noted an emphasis on minimum compliance (with the detailed regulations), rather than broader principles of good internal control and governance. In some instances, LG officers questioned why we were reporting their failure to comply with internal policies – it was apparent that some only regarded non-compliance with legislation to be an audit issue.
In our reporting we have made, and intend to continue making recommendations that not only address non-compliance, but which also assist to achieve better practice in financial management and control. This is aimed at remedying weaknesses before they contribute to potential breaches of legislation.
Only 11 of the 42 LGs we surveyed had an internal audit function. An effective internal audit function is important for ongoing maintenance and improvement of risk management, internal control and governance processes. The internal audit function acts as the independent eyes and ears for council on LG administration in key areas of risk. While recognising the difficulties for regional LGs to maintain an effective, independent internal audit function, we encourage LGs to collaborate with a view to effective internal audit assurance. We propose to cover this topic further in future performance audits.
Interaction with audit committees – audit entrance and exit meetings
Effective audit entrance and exit meetings are essential to good audit outcomes. These should facilitate informed, respectful and robust exchange between the auditors, management and the audit committee. This was the case for several of the 2017-18 audits.
On other audits however, the exit meeting was held with the entire council and this often hindered detailed discussion of the audit issues, due to the formality of proceedings and number of attendees. Section 7.12A of the LG Act requires the LG to meet with the auditor at least once each year, with the meeting typically occurring on completion of the audit. We strongly support this approach.
However, because of the number of attendees and time pressures at a full council meeting, it is preferable that, in advance of the council meeting, a more detailed exit meeting is held with the audit committee. The committee should preferably include a few council members only, with relevant skills/background in finance, risk management or auditing. We noted that 27 out of 42 LGs we surveyed had audit committees which included 5 or more council members. This is not considered better practice for facilitating effective entity-auditor communication, however we do recognise the potential challenges for regional entities in appointing members with specialist skills to their audit committees and the evident interest of councillors in audit-related matters.
We also made the following observations:
- In the past, it has generally not been common practice for audit entrance meetings to be held with the audit committee or council, and some exit meetings have also not been held with the audit committee or council. Australian Auditing Standard ASA 260 Communication With Those Charged With Governance requires the auditor to discuss certain key aspects of the audit planning and the audit results with those charged with governance. As a committee of council, the audit committee is the usual forum to enable effective audit communication.
- It is better practice for the auditors to highlight and explain the key elements of their entrance or closing report to the audit committee and management. Most of the meetings, especially exit meetings, did not follow a format that facilitated this but rather moved straight to councillors questioning the auditors. While this is important and as auditors we are happy to answer questions, as outlined above there are key matters that an auditor should directly communicate to those charged with governance.
- In some exit meetings, CEOs were, in our view, not given adequate opportunity to participate due to the formality of proceedings during audit meetings. CEOs and finance officers provide important information to those charged with governance, including updates on how audit findings have been prioritised and actioned.
At Appendix 3, we have briefly set out better practice guidelines for communications between auditors, management and councils.
Disclosure of audit communications
Sometimes during our planning or interim audit visit, we issue interim management letters to the CEO and council, to provide them early advice of our audit findings, to enable them to take timely remedial action.
However, these findings only form part of our report under section 7.12AD of the LG Act when we issue them as part of our report on completion of our audit. For this reason, our interim management letters advise that they may not be suitable for other purposes. They are not intended for public release until we issue them as part of our Audit Report, and indeed in our performance audit processes disclosure of draft findings is prohibited by the Auditor General Act 2006 (AG Act).
Some LGs have made these interim management letters public. However, we regard them as ‘working documents‘ until we issue them formally to the mayor, president or chairperson, the CEO and the Minister for Local Government as part of our final report.
- In addition to compliance with legislation, management should promote a culture of applying better practice and complying with internal policies.
- An in-depth audit exit meeting should be held with the audit committee, in advance of the council meeting. As far as is practicable, the audit committee should include a few council members, rather than the entire council.
- An audit entrance meeting should be held with the audit committee.
- Audit exit meetings should provide the auditor the opportunity to highlight the key audit issues, in a structured manner, and the CEO adequate opportunity to comment.
- LGs should not make interim audit findings public until they are received as part of our Audit Report on completion of the audit, unless specific urgent needs warrant earlier release.