Audit Committees in Local Government FinPro Professional Development Seminar

1. Audit Committees in Local Government FinPro Professional Development Seminar Linda MacRae Local Solutions Pty Ltd 25 October 2012 1

2. Contents • Legislative Framework • Audit – External and Internal • Internal Audit • Governance • Risks • Internal and External Auditor – Role • Management – Role • Audit - Outcomes • Questions for you to consider • Summary 2

3. Legislative Framework • Local Government Act 1989 as amended (LGA) • Local Government ( Finance and Reporting) Regulations 2004 • Long Service Leave Regulations • Australian Accounting Standards • Codes of ‘Best Practice’ – Model Budget; Model Annual Accounts; Internal Audit Guidelines • Council’s Policies and Procedures – eg Audit Committee Charter 3

4. Local Government Act Section 139: • A Council must establish an audit committee • An audit committee is an advisory committee • Ministerial Guidelines : • Audit Committees – ‘ A Guide to Good Practice for Local Government’ (January 2011) WHAT IS “GOOD PRACTICE” ?

5. Audit- External • Victorian Auditor-General (VAGO) is the External Auditor for all Victorian Councils • VAGO acts as the External Auditor or tenders for Contractors (on a 3 or 4 year cycle) to undertake individual Council’s external audit • The Contractor audits: • Annual Financial Statements • Performance Statement - to: • certify that the financial position is represented fairly & that all mandatory professional reporting requirements have been complied with. 5

6. Audit – Internal • Focus on internal control procedures & processes • 3 or 4 Year Internal Audit cycle • Most Council’s engage, through a tender process, a contracted Internal Auditor • Independent Chairperson • 2 or 3 independent representatives and 2 or 3 Councillors • Delegated charter from the Council – ensure regular review • Considers Reports & Recommendation from the Internal Auditor which are accompanied by Management comments • Makes recommendations to the Council & Management 6

7. Internal Audit - Objective • The Australian National Audit Office (NANO) defined objective of an audit Committee is: ‘to provide independent assurance to those charged with governing an entity on the entity’s risk, control and compliance framework and its external accountability responsibilities’

8. Internal Audit – Functions Audit Committee Charter sets out: • Objective • Purpose • Roles • Responsibilities • Accountabilities • Reporting Framework

9. Committee Roles & Responsibilities Evidence and Assurance around: • Financial Reporting • Internal Control Processes • Risk Management • Business Continuity • Compliance

10. ‘Key Words’ • Oversight / Oversee • Control • Integrity • Ethical • Monitor • Review • Evidence • Assurance • Mitigate • Liaise • Compliance

11. Limits An Audit Committee : • Does not have any delegated financial responsibility –financial management is a responsibility of Council • Has no management functions – must maintain independence of management • Can make recommendations to Council

12. Committee - Add Value • Offers independent advice – mix of skills • Professional expertise of competent and independent persons • Focus on strategic risk management • Provides an efficient use of resources • Focus on internal controls; assurance & accountability • Test and challenge management assumptions

13. Committee Work Plan • Meeting Cycle – generally 4 or 5 meetings per year • Annual Internal Audit Work Plan • Strategic Internal Audit Work Plan (generally 3 or 4 years)- sets direction; needs to be flexible and review annually • Link to the Audit Committee Charter - Standing Agenda Items at each Meeting: • Risk Management – Operational and Strategic; • Status of Outstanding Internal Audit Recommendations ( Audit Register) ; • Monthly or Quarterly Finance Report • General and Rate Debtors Outstanding • Status of Internal Audit Work Plan • New Agenda Items at each Meeting: • Internal Audit Reports • Specific Management Reports • Annual assessment of Committee’s performance • Council’s responses to Reports from VAGO; Ombudsman; DPCD; L G Inspectorate and relevant Legislation

14. Governance Good Governance Principles for an Audit Committee : • Independence – clear responsibilities and purpose • Full disclosure • Confidentiality • Integrity • Ethical standards • Skill Mix • Competence • Open and effective relationships • Reporting to Council • Compliance

15. Disclosures to the Audit Committee • Disclosures at start of meeting of Management by: • the CEO: “To the best of my knowledge, after due enquiry,  there have been no major non compliance issues since the date of my last report .    Based on my current information there is no reason to believe that there may be a major non compliance in the future” • Disclosure of any fraud activity; major law suits. • Seek assurance re Annual Statements – eg – full disclosure; valuations; contingent liabilities; cash flow result • the Internal Auditor: • “Our work has not been impeded or obstructed in any way since the last Meeting”.

16. Reports to Council • Minutes to Council Meeting • Confidential • Recommend Council approve annual financial statements • Annual Report by Chair of Audit Committee

17. Reports to Council - cont Annual: • Work achievements, Outstanding matters, Recommendations • Assurance about Risk management and Internal Control environment • Evaluation of internal and external audit

18. Confidentiality LGA - Confidential Information - Section 77 • “A person who is, or has been, a Councillor or a member of a special committee, must not release information that the person knows, or should reasonably know, is confidential information.”

19. Confidentiality • The Committee must be able to operate in an open, frank and effective manner • It considers matters such as fraud control; ethics, integrity and governance; risk (including financial risk) identification and mitigation • Sensitive issues reported on involving practices and processes that can have staff and other confidential implications • Internal and External Auditors often make confidential presentations to the Committee on a range of matters • The Committee can then advises Council on addressing any matters arising from such issues.

20. Conflict of Interest • LGA-Conflict of Interest – Sec 77A to Sec 81 • Audit Committee Members required to comply

21. Risks Committee to consider- Operational: • Identify – discuss –eg –under resourced; ageing workforce; Strategic : • Identify – discuss – eg - environmental; financial sustainability; ageing population; size of municipality • Are these risks incorporated in the Strategic Audit Plan? Ensure Council has considered such risks and is endeavoring to implement controls to manage/mitigate these

22. Internal Auditor - Role • Understand Local Government: • - Environment – Legislation; Political; Operational and Governance • - Current Issues – Strategic and Operational • - Processes and systems • Sufficiently resourced – skilled staff • Relationships – build – Management; Committee and External Auditors • Add Value – Continuous Improvement • Practical Recommendations that minimise or mitigate risk • Risk Rankings of Outcomes that reflect the real risk to Council if not addressed

23. External Auditor - Role • Understand Local Government: - Environment – Legislation; Political; Operational and Governance - Current Issues – Strategic and Operational - Processes and systems • Sufficiently resourced – skilled staff • Relationships – build – Management; Committee and Internal Auditors • Add Value – Continuous Improvement • Recommendations that minimise or mitigate risk in the Annual Report disclosures

24. Management’s Role • Must have CEO and Executive Management Support and ownership– VIP ! • Audit Committee Member Selection - • Include in Charter – cyclical replacement of External members • Consider complimentary ‘skill mix’ of members – general; financial and risk • Induction – Councillors and External Members • Clear Meeting Agendas and Work Plan • Understand the ‘risk ranking’ and the implications • Process for ‘tracking’ status of outstanding recommendations – ‘interplan’; excel etc. • Keep Audit Committee Members informed on Industry issues • Keep the Chair informed of Council Governance breaches and any actual or potential fraud matters • Liaise with Internal and External Auditors regularly to ensure healthy relationship

25. Audit Outcomes • Council invests significant resources in the External and I/A Function • Must be able to demonstrate outcomes – to Community; Council; Management and Staff • Must ‘add value’ to Council – not ‘tick & flick’ • Staff and Processes must benefit from achievable; continuous improvement recommendations

26. Questions for you to consider? • Does your Council follow Audit Committee ‘Good Practice’ ? • Does the Audit function at your Council have CEO and Executive Management support ? Reports etc to Executive Group for consideration • Does your Audit Committee comprise an appropriate ‘skill mix’ of Members ( including Councillors)? • Do you structure Audit Committee Agenda’s and Work Plans timely and appropriately • Do you have mechanisms/ tools to track the status of the implementation of I/A Recommendations • Does your Council get ‘good value’ from its External and I/A Function by value adding and continuous improvement recommendations ? • Do you understand the risk ranking used? • Does your Audit Committee undertake an evaluation? • Does your Council follow the principles of ‘good governance’ – including full disclosure; confidentiality; conflict of interest etc ?

27. In summary:Internal and External Audit must add value to Council by the independent contribution of Auditors and Independent Audit Committee members by obtaining evidence and assurance to ensure that control processes are in place to manage or mitigate potential risks 27