Current audit issues in the local government sector

1. Current audit issues in the local government sector • John Doyle • Auditor-General

2. Outline A little about me Role of the Auditor-General My approach Review of the Audit Act 1994 Key issue in local government finance - AASB 13 Fair Value Measurement Recurring weaknesses in the public sector Upcoming audit activity in local government

3. A little about me Recent career Appointed Auditor-General of Victoria – 1st July 2013 Auditor General of British Columbia - 2007 to 2013 Deputy Auditor General of Western Australia - 2005 to 2007 Director, Corporate Governance at WA Health Associate Professor & Head of the School of Accounting & Finance, University of Notre Dame Degrees and professional affiliations Master of Business Administration, Master of Accounting FCPA, CA, FIIA, CIA FCCA (United Kingdom), FCA (Canada)

4. Role of the Auditor-General Purpose—assurance to Parliament. Independence—critical • enshrined in the Constitution Act 1975 • no involvement in policy or politics. Appointment—by Parliament as the external auditor for around 550 public sector entities. Mandate—financial audit (ongoing and cyclical), performance audits (individual once-off projects). Reporting—around 35 reports to Parliament annually.

5. My approach Acquit my legislative responsibilities Demonstrate a high bar for accountability to the community → citizens have the right to expect high levels of accountability for funds used by government High expectations for financial reporting → e.g. statements are free from non-trivial errors Report what we find without fear, favour or affection

6. My approach Go beyond assurance to make a difference Make the most of the information we have access to and turn this into something valuable e.g. → reports that consolidate audit results for a sector → maximise our findings through presentations, media releases, education products etc. → use the full range of services available under auditing standards to really make a difference! Present recommendations that work and follow up → agency responses to reports as ‘action plans’ → reinstate follow ups for all audits.

7. My approach Principles underpinning this approach Good relationships Accessibility Independence Accountability Professionalism However…my ability to deliver this kind of contemporary, transparent and effective external audit is currently constrained by out-of-date legislation…

8. Review of the Audit Act 1994 Key principles driving our current bid for reform: Audit coverage: A consistent mandate Audit functions: A comprehensive and contemporary mandate Audit operations: An efficient and effective audit function Audit reporting: Drive improvement through sharingaudit findings Audit independence: Full discretion and appropriate oversight

9. Key reforms sought by VAGO Consistent audit coverage – ability to audit all activity funded by Parliament (inc. outsourced) Contemporary audit functions – mandatory assurance audits of controls and performance statements Efficient audit operations – remove rigid audit processes (e.g. specifications) already covered via standards Audit reporting – lift constraints on sharing information with integrity system/other audit offices Audit independence– onerous/duplicate oversight arrangement (PAEC/VI/IBAC)

10. Key issue in local government finance - AASB 13 Fair Value Measurement Key concepts Fair value = exit price Highest and best use concept Valuation techniques - Market / Cost (depreciated replacement cost) / Income (discounted cash flows) Maximising use of observable inputs • But not at the expense of a faithful representation of fair value Fair value hierarchy • Level 1, 2 or 3 (already used for financial instruments) • More disclosures the lower down the hierarchy

11. AASB 13 Fair Value Measurement VAGO’s Expectations AASB 13 requires information not previously reported or audited to be disclosed. • Audit clients need to analyse and collect this new information • Audit clients will likely need to access their valuer No change in accounting requirements – depreciation / useful life / residual value / impairment Depreciated Replacement Cost continues to be an acceptable method to determine fair value Legal restrictions on assets needs to be considered.

12. AASB 13 Fair Value Measurement Auditing the valuation A valuer is management’s expert Using an expert does not diminish management’s responsibility for the information provided and the fair value reported. Auditors will review management’s assumptions – these may be assumptions articulated by the valuer Management may need access to valuers during the audit process.

13. AASB 13 Fair Value Measurement Instructions to Valuers Consider early what information you are going to need about the valuation Give clear instructions to your valuer Discuss key concepts – restrictions on the asset, highest and best use, market observable inputs, unobservable inputs Discuss the instructions with your auditor The valuer is available for any questions you may need to follow up

14. Recurring weaknesses across the public sector Quality information for decision-making Governance and effective oversight Planning and delivery of services and infrastructure Measuring and communicating performance Managing information accountably and securely Procurement and contract management Services for citizens with complex needs Whole of sector risks

15. 1. Quality information for decision-making Sufficient information to support decision-making • Gaps in information underpinning business cases – either not collected, or not provided by agencies to decision-makers Science and Mathematics Participation Rates and Initiatives (2012) Information must be accurate and analysed appropriately • Information was sometimes (alarmingly) inaccurate • Agencies did not verify or undertake analysis with sufficient rigour • Qualitative information was often poorly used • Led to under estimates of budget and time Planning for Water Infrastructure in Victoria (2008)

16. 3. Planning and delivery of services and infrastructure Robust analysis of options • Planning documents were hastily developed/narrowly focused • Failed to consider user needs/perspective Irrigation Efficiency Programs (2010) Understanding and forecasting future demand • Some times no attempt made to forecast future demand • When forecast made – data often seriously flawed Management of Major Road Projects (2010)

17. 4. Measuring and communicating performance Lack of critical elements of measurement frameworks • Inappropriate targets or indicators that are not relevant to the activity they seek to measure (*common finding, both financial/performance audits) Performance Reporting by Local Government (April 2012) Outputs and activities measured instead of outcomes • Not measuring the benefits, either because of lack of data or a choice to stay at output-level (*this is a common area of interest from MPs) Carer Support Programs (2012) Building credible performance measurement into activities • Evaluation not planned from the start Taking Action on Problem Gambling (July 2010)

18. Learning from other audits VAGO reports are a resource: Even audits of agencies outside your sector are relevant • Themes discussed come from across all of government Make the most of the state’s investment in audit: Use a VAGO report to carry out a self-assessment Use VAGO’s reports to inform your risk management.

19. Upcoming audit activity in the sector Annual Plan 2014-15 due June 2014 • Two-year plan of performance audit topics and financial audit areas of focus Financial audit 2013-14 • Strategies being issued in coming months • Areas of focus: management of grants, management of creditors Performance audits • Shared services in local government (due May 2014)

20. Finally Changes at VAGO Ron Mak moving to Hospitals Tim Loughnan taking on Local Government Audits – reviewing mix of in-house/contracted Coming up Local Government Audit Committee Chairs forum • Bendigo, March 2014

21. Discussion Contacting me: ag@audit.vic.gov.au +61 3 8601 7101 Contacting VAGO: www.audit.vic.gov.au +61 3 8601 7000 Level 24, 35 Collins Street Melbourne Victoria 3000 Australia