Audit Committees in Local Government FinPro Professional Development Seminar Linda MacRae Local Solutions Pty Ltd 25 October 2012 11.

Audit Committees in Local Government

FinPro Professional Development Seminar

Linda MacRae

Local Solutions Pty Ltd

25 October 2012 11

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Contents

Legislative FrameworkAudit – External and InternalInternal AuditGovernance RisksInternal and External Auditor – RoleManagement – RoleAudit - OutcomesQuestions for you to considerSummary

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Legislative FrameworkLocal 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

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Local Government ActSection 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” ?

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Audit- ExternalVictorian 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.

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Audit – InternalFocus 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

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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’

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Internal Audit – Functions

Audit Committee Charter sets out:

ObjectivePurposeRolesResponsibilitiesAccountabilitiesReporting Framework

Committee Roles & Responsibilities

Evidence and Assurance around:

Financial Reporting

Internal Control Processes

Risk Management

Business Continuity

Compliance9

‘Key Words’Oversight / OverseeControlIntegrity EthicalMonitorReviewEvidenceAssuranceMitigateLiaiseCompliance 10

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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

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Committee - Add ValueOffers 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

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Committee Work PlanMeeting 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

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Governance

Good Governance Principles for an Audit Committee :Independence – clear responsibilities and purposeFull disclosure ConfidentialityIntegrity Ethical standards Skill Mix CompetenceOpen and effective relationshipsReporting to CouncilCompliance

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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”.–

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Reports to Council

Minutes to Council Meeting

Confidential

Recommend Council approve annual financial statements

Annual Report by Chair of Audit Committee

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Reports to Council - cont

Annual:

Work achievements, Outstanding matters, Recommendations

Assurance about Risk management and Internal Control environment

Evaluation of internal and external audit

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ConfidentialityLGA - Confidential Information - Section

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“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.”

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ConfidentialityThe 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.

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Conflict of Interest

LGA-Conflict of Interest – Sec 77A to Sec 81

Audit Committee Members required to comply

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RisksCommittee 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

Internal Auditor - Role

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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

External Auditor - RoleUnderstand 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 23

Management’s RoleMust 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 riskInduction – Councillors and External MembersClear Meeting Agendas and Work PlanUnderstand the ‘risk ranking’ and the implicationsProcess for ‘tracking’ status of outstanding recommendations – ‘interplan’; excel etc.Keep Audit Committee Members informed on Industry issuesKeep the Chair informed of Council Governance breaches and any actual or potential fraud mattersLiaise with Internal and External Auditors regularly to ensure healthy relationship

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

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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 considerationDoes your Audit Committee comprise an appropriate ‘skill mix’ of Members ( including Councillors)?Do you structure Audit Committee Agenda’s and Work Plans timely and appropriatelyDo you have mechanisms/ tools to track the status of the implementation of I/A RecommendationsDoes 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 ? 26

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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