At 1 March 2019, we had issued auditor’s reports for 42 LGs for the financial year ending 30 June 2018.
The auditor’s report includes:
- the audit opinion on the annual financial report
- a description of significant non-compliance (if any) in relation to the financial report or other financial management practices
- an opinion whether there were any material matters that indicate significant adverse trends in the financial position of the LG.
Under the Amendment Act, the chief executive officer (CEO) is required to publish the annual report, including the audited financial report and the Auditor General’s auditor’s report, on the LG’s website within 14 days of the annual report being accepted by the LG. A table of all auditor’s reports issued by the Auditor General for 2017-18 is in Appendix 1.
Audit opinions on annual financial reports
An unqualified audit opinion in the auditor’s report indicates the annual financial report was based on proper accounts and records, and fairly represented performance during the year and the financial position at year end. All but 2 LGs received unqualified (clear) audit opinions.
We issue a qualified opinion in our auditor’s report on a LG’s annual financial report if we consider it is necessary to alert readers to material inaccuracies or limitations in the financial report that could mislead readers. The following 2 LGs received a qualified opinion:
Shire of Brookton
We issued a qualified opinion as the Shire did not recognise the 2018-19 financial assistance grant of $504,598 received from the Commonwealth Government in June 2018 as revenue in accordance with Australian Accounting Standard AASB 1004 ‘Contributions’.
Instead, the Shire advised that it intended to recognise the revenue in 2018-19, and recorded the grant as Trade and other payables at 30 June 2018.
This resulted in the Shire’s net result for the year being understated by $504,598 in its Statements of Comprehensive Income and its Trade and other payables in the Statement of Financial Position being overstated by the same amount.
In addition, this resulted in understatement of the current, debt service cover and operating surplus ratios disclosed in the Notes to their financial report.
Town of Cambridge
The opinion of the Town was qualified because in previous years the interest earned on invested trust funds was incorrectly recognised as income instead of being returned to the entitled recipients as required by the LG Act.
In 2017-18, to partially address this, the Town made a prior year adjustment to reduce income and cash balances, and also revised related Notes to the financial report.
The Town’s best estimate of the cumulative effect of interest earned on trust funds at 30 June 2018 was approximately $450,000, of which a portion that had not yet been determined should have already been paid back to entitled recipients.
Prior year qualified opinion – 2017-18 audit still in progress
In 2016-17 the Shire of Laverton received a qualified opinion on its financial report because the auditor was unable to confirm that land, buildings, plant and equipment, furniture and equipment tools and infrastructure assets were reported at fair value.
The 2017-18 audit is still in progress because key aspects of a valuation, performed during the year, are still being reviewed.
Material matters of non-compliance with legislation
Regulation 10(3)(b) of the Local Government (Audit) Regulations 1996 (LG Audit Regulations) requires the auditor to report, in the auditor’s report, any matters indicating non compliance with Part 6 of the LG Act, the Local Government (Financial Management) Regulations 1996 (LG Financial Management Regulations) or applicable financial controls in any other written law. These matters may relate to the financial report or to other financial management matters.
In determining which matters to report, we apply the principles of materiality, as required by Australian Auditing Standard ASA 320 Materiality in Planning and Performing an Audit. Factors that we consider include the extent and frequency of the non-compliance, and the effect or potential effect.
Some of the matters we have reported relate to non-compliance with specific sections of the LG Act or regulations. We consider regulation 5(1) of the LG Financial Management Regulations to be particularly important, because failure to effectively apply those requirements can result in significant financial loss, inefficiency, financial misreporting or fraud. Regulation 5(1) requires efficient systems and procedures to be established, including:
- for the proper maintenance and security of the financial records of the LG
- to ensure proper accounting for municipal or trust revenue, expenses, assets and liabilities
- to ensure proper authorisation for the incurring of liabilities and the making of payments
- for the maintenance of payroll, stock control and costing records
- to assist in the preparation of …. accounts and reports required by the Act or the regulations.
We considered many of the findings that we reported to represent non-compliance with this important section of the LG Financial Management Regulations.
Our individual findings were included in our auditor’s reports which are included in annual reports on each LG’s website. For the convenience of Parliament and the public, we have summarised the matters we reported in the following table:
|Controls over accounting journal entries||At 12 LGs, we found that accounting journal entries were posted with no evidence of independent review and approval by another person.
Accounting journals can represent significant adjustments to previously approved accounting transactions, and could result in, for example, one type of expenditure being re-coded to another type of expenditure. Journals should therefore be subject to independent review.
|Quotes not obtained for purchases below the tender threshold||At 4 LGs, 26% to 57% of purchases we sampled below the $150,000 tender threshold had inadequate or no evidence that a sufficient number of quotations was obtained, to test the market. There was no documentation to explain why other quotes were not sought.
This practice increases the likelihood of not receiving value for money in procurement. This could also result in favouring of certain suppliers, although our audits did not identify any instances.
|Review not performed of systems and procedures||At Bunbury-Harvey Regional Council, a review of the appropriateness and effectiveness of the Council’s systems and procedures in relation to risk management, internal controls and legislative compliance was not completed at least once every two years as required by Regulation 17 of the LG Audit Regulations. The last review was in 2014.|
|Approval to make investments||At City of Cockburn, the officer sending communications to the City’s investment advisor, instructing them to make investments, had not been delegated with authority to issue these instructions. Although management advised that another officer with delegation was consulted before making investment decisions, there was no evidence of consultation and no approval of the instructions to invest.|
|Inadequate recordkeeping for infrastructure assets||A stocktake of infrastructure was conducted at the City of South Perth for the first time in a number of years, and the City found $21 million of infrastructure assets that was not recorded on the asset register.
The asset register has however now been appropriately updated.
|System access controls||More employees than necessary at the Shire of Brookton had the ability to make modifications in the system to the rates used for fees and charges. The Shire did not have a system logging process to report and review changes made to fees and charges.
In addition, a shared account could be used to modify creditor and debtor details in the system. This increased the risk of unauthorised changes to key information, although our audit sampling did not identify any.
|Financial ratio not reported||The Shire of Bruce Rock did not report the Asset Renewal Funding Ratio in the annual financial report as required by regulation 50(1)(c) of the LG Financial Management Regulations, as planned capital renewals and required capital expenditure were not estimated in a long term financial plan and asset management plan respectively.
The Shire has advised that the plans are currently being completed.
|Financial ratios not reported||The Shire of Denmark did not report the Asset Renewal Funding Ratio in the annual financial report as required by regulation 50(1)(c) of the LG Financial Management Regulations, as planned capital renewals and required capital expenditure were not estimated in a long term financial plan and asset management plan respectively.
The Shire also did not report the Asset Consumption Ratio for 2017 and 2016 in the annual financial report as required by regulation 50(1)(c) of the LG Financial Management Regulations, as current replacement cost of depreciable assets was not estimated in previous years.
|Financial ratio not reported||The Shire of Kondinin did not report the Asset Renewal Funding Ratio in the annual financial report as required by section 50(1)(c) of the LG Financial Management Regulations, as management considered the available information on planned capital renewals and required capital expenditure was unreliable.|
|No signed employment contracts for 3 staff||For 3 employees at the Shire of Koorda, there were no signed employment contracts or letters of employment in the Shire’s records.|
|Lack of policies, review not performed of systems and procedures, and financial ratio not reported||The Shire of Nungarin had not developed key policies and procedures, such as purchasing and risk management policies.
A review of the appropriateness and effectiveness of the Council’s systems and procedures in relation to risk management, internal controls and legislative compliance was not completed at least once every two calendar years as required by Regulation 17 of the LG Audit Regulations.
The Shire has not reported the Asset Renewal Funding Ratio for 2016, as planned capital renewals and required capital expenditure were not estimated in a long term financial plan or asset management plan, as required by the LG Financial Management Regulations.
|Bank reconciliation||Several monthly bank reconciliations at Shire of Perenjori were not completed in a timely manner, and some were not independently reviewed by management. In addition, one had alterations that were not explained, and one did not have schedules to support the reconciling items.|
|Review not performed of systems and procedures||A review of the appropriateness and effectiveness of the Council’s systems and procedures in relation to risk management, internal controls, and legislative compliance was not completed by the Shire of Tammin at least once every two calendar years as required by Regulation 17 of the LG Audit Regulations.|
|Approval of payments, bank reconciliations and reporting to Council||For 19 of 26 payments we sampled at Shire of Yalgoo, there was no evidence of the signing officers examining supporting documentation to payments and documenting approval.
Several monthly bank reconciliations were not completed in a timely manner, and some were not independently reviewed by management. In addition, the 30 June 2018 bank reconciliation included numerous uncleared payments and deposits in excess of 12 months old.
Due to difficulties implementing new accounting software, four statements of financial activity were not presented at an ordinary meeting of Council within two months after the end of the month to which the statement relates, which is not in compliance with Regulation 34(4)(a) of the LG Financial Management Regulations.
|Delegations, reporting of financial ratio, and reporting of a separate balance sheet for a trading undertaking||In April 2018 at the Town of Cambridge, Council approved a delegation to the CEO to make payments from the municipal fund. Management was however not able to provide evidence that these powers had been delegated prior to that date. Payments from the municipal fund were approved by the CEO or other staff prior to April 2018.
The Town also did not report the Asset Renewal Funding Ratio for 2016 and 2017 as planned capital renewals and required capital expenditure were not estimated in the long term financial plan and asset management plan respectively, as required by the LG Financial Management Regulations.
The Town did not report a balance sheet for its major trading undertaking, the Wembley Golf Course, in the Notes to the financial report, as required by regulation 45 of the LG Financial Management Regulations.
Table 1: Material non-compliance with legislation reported in auditor’s reports
Adverse trends in the financial position of local government entities
Regulation 10(3)(a) of the LG Audit Regulations requires the auditor to report, in the auditor’s report ‘any material matters that in the opinion of the auditor indicate significant adverse trends in the financial position or the financial management practices of the local government’.
A performance audit of adverse financial trends would typically consider numerous aspects of a LG’s finances, and inter-relationships between financial ratios. However, for purposes of the annual financial audit process, we have limited our audit to a high level assessment of whether the 7 financial ratios reported in the notes to the financial report achieved the standards set by the Department of Local Government, Sport and Cultural Industries (the Department). When determining whether a trend was significant, in some instances we allowed for a ratio to be slightly lower than the Department’s standard, in recognition that failing to meet some standards is more significant than failing to meet others.
LGs report these ratios for the current year and the preceding 2 years. Our trend analysis was limited to these 3 years of information.
The 7 ratios, defined in regulation 50(1) of the LG Financial Management Regulations are:
- current ratio
- asset consumption ratio
- asset renewal funding ratio
- asset sustainability ratio
- debt service cover ratio
- operating surplus ratio
- own source revenue coverage ratio.
We reported that 38 ratios at 24 LGs indicated adverse trends. It is important to note that although most of the ratios are useful indicators, further assessment would be necessary before concluding on the overall financial position of an entity.
Emphasis of Matter included in auditor’s reports
Regulation 16(a) of the LG Financial Management Regulations requires that the financial report of a LG is not to include the value of certain types of land, including land under roads, that are managed by or under the control of the LG. The Department informed us that it considered that the benefits of reporting land under roads did not justify the cost of its periodic valuation. The exclusion of any land under roads acquired on or after 1 July 2008 is inconsistent with Australian Accounting Standard AASB 1051 Land Under Roads. Regulation 4(2) of the LG Financial Management Regulations provides that if a provision of the Australian Accounting Standards is inconsistent with a provision of a regulation, then the regulation prevails to the extent of the inconsistency.
We noted that this significant divergence from the accounting standards was not being clearly disclosed in the annual financial reports of LGs. As land under roads is reported for the WA State Government sector and some other LG jurisdictions, we considered it important to alert readers to this different method of reporting. We requested that LGs prominently disclose this in their accounting policy notes to their financial reports. Although we considered that this inconsistency between the regulations and the accounting standards did not warrant a qualified audit opinion, we included an Emphasis of Matter paragraph in our auditor’s reports to highlight this accounting treatment for readers:
Regulation 16 of the Local Government (Financial Management) Regulations 1996 does not allow a local government to recognise some categories of land, including land under roads, as assets in the annual financial report. My opinion is not modified in respect of this matter.