1 Performance and accountability – reflections from audits Des Pearson Auditor-General 5 December 2012 ▌ Municipal Association of Victoria

Today’s presentation 2 1.Purpose, independence and mandate 2.Recent audit findings on strategic planning 3.Upcoming audits 4.Questions 5 December 2012 ▌ Municipal Association of Victoria

3 1. Purpose, independence and mandate 5 December 2012 ▌ Municipal Association of Victoria

External auditor of the public sector 4 5 December 2012 ▌ Municipal Association of Victoria Agencies Executive Government Auditor-General Independent officer of Parliament Parliament The public

Purpose and independence 5 To provide assurance to Parliament on the accountability and performance of the Victorian public sector. Auditing in the public interest since 1851 Constitutional safeguard to serve interests of Parliament Accountable to Parliament via the Public Accounts and Estimates Committee. ‘Independent office of Parliament’ – Constitution Act 1975 s94B ‘has complete discretion in the performance or exercise of his or her functions or powers and, in particular, is not subject to direction from anyone’. Balanced by accountability requirements for the office. 5 December 2012 ▌ Municipal Association of Victoria

Auditor-General’s mandate 6 Attest audit – ‘how much’ Annual audit of the financial statements of around 550 agencies and the non-financial performance statements of around 115 agencies Includes local government: Mandate for financial statement audits → Audit Act 1994, s8 Mandate for non-financial performance statement audits → Local Government Act 1989, s133 Around 70% (by number) by external providers from private sector. Produce audit opinions and management letter To form these opinions, we focus on the internal controls in place to safeguard the reliability and completeness of financial statements Includes more in-depth focus into different specific controls each year → areas of focus 5 December 2012 ▌ Municipal Association of Victoria

Auditor-General’s mandate 7 Attest audit – ‘how much’ (cont.) Report to Parliament on: Review of the Estimated Financial Statements Examination of the State’s Annual Financial Report Results from audits (by sector) → Local Government: Results of the Audits tabled in November Contains assessment of: Financial results Financial sustainability Quality of performance information Internal controls including focus areas: – budget development and management – outsourcing activities 5 December 2012 ▌ Municipal Association of Victoria

Auditor-General’s mandate 8 Performance audit – ‘how well’ Around 28 audits a year: Determine whether an authority is achieving its objectives and operating economically, efficiently and effectively in compliance with relevant Acts Not to question the merits of policy objectives Wide powers of access and examination Includes local government → mandate from Audit Act 1994, s15 Reporting on the results of performance audits Rolling program of audits Annual Plan outlines VAGO’s four-year plan of audits 5 December 2012 ▌ Municipal Association of Victoria

Value of audit to local government 9 This means each year, VAGO looks at all 79 councils in up to 3 ways: Attest audits of financial statements Attest audits of performance statements Performance audits (subject to annual plan) → There is a wealth of information available to you from our audits on the performance of your council. 5 December 2012 ▌ Municipal Association of Victoria

10 2. Recent audit findings on strategic planning 5 December 2012 ▌ Municipal Association of Victoria

Themes from recent performance audits 11 A review of local government audits between 2000 and 2011 (in Performance Reporting in Local Government) identified recurring issues with planning and budgeting: Lack of long-term strategic plans underpinning financial plans Inadequate links between corporate plans, asset management plans and budget processes Inadequate funding models resulting from poor forward planning Inadequate asset management plans, compromising effective management of $1.6 billion in assets. 5 December 2012 ▌ Municipal Association of Victoria Page 9

Auditing the 2003 reforms – the Local Government Act 1989 was amended, introducing: a new planning framework for local government, aimed at achieving more effective strategic planning for municipalities. designed to better align strategic planning with annual planning a requirement for councils to apply principles of sound financial management to their planning and budgeting 2011 – audit of Business Planning for Major Capital Works and Recurrent Services in Local Government (September 2011) Objective – determine the effectiveness of council business planning and budgeting for major capital works and recurrent services. 5 December 2012 ▌ Municipal Association of Victoria

Audit conclusions 13 Intent of planning reforms not realised Councils acquitted minimum statutory requirements instead of integrating planning 3 of the 4 councils examined need to improve their planning and budgeting considerably. So… What were the specific problems with council planning that the audit identified? 5 December 2012 ▌ Municipal Association of Victoria

1. Community consultation 14 ‘The primary objective of a Council is to endeavour to achieve the best outcomes for the local community having regard to the long term and cumulative effects of decisions’ – Local Government Act, s 3C → council planning should begin with community consultation. Audit findings Three of the four councils examined had a community engagement policy, however: Only one council had applied this policy as intended Two could not demonstrate that they had adequately sought, considered or analysed community expectations. One council did not have a community engagement policy, and while it did do some consultation, it had not fully informed the community on the consequences of its aspirations. 5 December 2012 ▌ Municipal Association of Victoria

2. Four-year council plan 15 Intention of 2003 reforms – get councils to establish links between: Objectives/desired outcomes Resources needed to achieve these How progress will be measured Four-year council plan contains: Strategic objectives/outcomes Strategies for achieving these objectives Key performance indicators to measure progress → encourage people to think about what is important to their community 5 December 2012 ▌ Municipal Association of Victoria

Problems with council plans 16 Strategic objectives not clearly articulated. Compromises the extent to which you can achieve what you set out to Difficult to measure Confused lower level tasks with strategic objectives Key performance indicators Focused on activities not outcomes Too many indicators – hard to measure Targets One council had none Another council’s targets were overly optimistic. 5 December 2012 ▌ Municipal Association of Victoria

3. Integrating planning and budgeting 17 5 December 2012 ▌ Municipal Association of Victoria

Integrating planning and budgeting 18 Need to understand and recognise the importance of integrating your business planning and budgeting. Aligning the different components of planning allows them to support the objectives and strategies of council plans. Not mandated → but critical to ensuring integrated planning Benefits of integration: Aligns the council plan with community values and priorities Enables longer-term service delivery and resource allocation decisions that extend beyond the four-year council planning cycle 5 December 2012 ▌ Municipal Association of Victoria

Integrating planning and budgeting 19 Finding: Three of the four councils audited had not integrated their planning effectively. We found examples of: Expenditure and asset investment decisions were primarily driven by a focus on improving financial ratios, rather than the priorities emanating from service and asset planning Lack of divisional plans to support implementation of council plans Not all initiatives/activities in shorter-term plans clearly linked to council plan’s objectives Different plans (e.g. corporate plan and council plan) did not have the same actions in them. 5 December 2012 ▌ Municipal Association of Victoria

20 3. Upcoming audits 5 December 2012 ▌ Municipal Association of Victoria

Performance audit – proposed topics 21 Rating practices in local government (February 2013) Organisational sustainability of small councils (June 2013) Asset management and maintenance by councils ( ) Shared services in local government ( ) Effectiveness of councillor training and support ( ) Long-term financial planning by local government ( ) Emergency management for fire, flood and other potential disasters ( ) Land use planning: Preparing for risk of rising sea levels ( ) 5 December 2012 ▌ Municipal Association of Victoria

Attest audit – proposed areas of focus Outsourcing Budget management Rate revenue Audit committees Credit card security and usage Management of creditors Risk management Asset revaluation reserve Management of employee leave 5 December 2012 ▌ Municipal Association of Victoria

Questions 23 5 December 2012 ▌ Municipal Association of Victoria

More information 24 All our tabled audits and information on upcoming audits is available at Level 24, 35 Collins Street Melbourne Victoria 3000 Australia December 2012 ▌ Municipal Association of Victoria