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
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.”
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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
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