28 February 2014 ▌ Local Government Finance Professionals Conference
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Current audit issues in the
local government sector
John Doyle
Auditor-General
28 February 2014 ▌ Local Government Finance Professionals Conference
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
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28 February 2014 ▌ Local Government Finance Professionals Conference
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)
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28 February 2014 ▌ Local Government Finance Professionals Conference
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.
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28 February 2014 ▌ Local Government Finance Professionals Conference
My approach
1. Acquit my legislative responsibilities
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Demonstrate a high bar for accountability to the
community
→ citizens have the right to expect high levels of
accountability for funds used by government
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High expectations for financial reporting
→ e.g. statements are free from non-trivial errors
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Report what we find without fear, favour or affection
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28 February 2014 ▌ Local Government Finance Professionals Conference
My approach
2. Go beyond assurance to make a difference
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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!
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Present recommendations that work and follow up
→ agency responses to reports as ‘action plans’
→ reinstate follow ups for all audits.
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28 February 2014 ▌ Local Government Finance Professionals Conference
My approach
Principles underpinning this approach
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Good relationships
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Accessibility
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Independence
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Accountability
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Professionalism
However…my ability to deliver this kind of contemporary,
transparent and effective external audit is currently
constrained by out-of-date legislation…
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28 February 2014 ▌ Local Government Finance Professionals Conference
Review of the Audit Act 1994
Key principles driving our current bid for reform:
1. Audit coverage: A consistent mandate
2. Audit functions: A comprehensive and contemporary
mandate
3. Audit operations: An efficient and effective audit function
4. Audit reporting: Drive improvement through sharing
audit findings
5. Audit independence: Full discretion and appropriate
oversight
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28 February 2014 ▌ Local Government Finance Professionals Conference
Key reforms sought by VAGO
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1. Consistent audit coverage – ability to audit all activity funded
by Parliament (inc. outsourced)
2. Contemporary audit functions – mandatory assurance audits
of controls and performance statements
3. Efficient audit operations – remove rigid audit processes
(e.g. specifications) already covered via standards
4. Audit reporting – lift constraints on sharing information with
integrity system/other audit offices
5. Audit independence – onerous/duplicate oversight
arrangement (PAEC/VI/IBAC)
28 February 2014 ▌ Local Government Finance Professionals Conference
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
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28 February 2014 ▌ Local Government Finance Professionals Conference
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.
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28 February 2014 ▌ Local Government Finance Professionals Conference
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.
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28 February 2014 ▌ Local Government Finance Professionals Conference
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
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28 February 2014 ▌ Local Government Finance Professionals Conference
Recurring weaknesses across the public sector
1. Quality information for decision-making
2. Governance and effective oversight
3. Planning and delivery of services and infrastructure
4. Measuring and communicating performance
5. Managing information accountably and securely
6. Procurement and contract management
7. Services for citizens with complex needs
8. Whole of sector risks
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28 February 2014 ▌ Local Government Finance Professionals Conference
1. Quality information for decision-making
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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)
28 February 2014 ▌ Local Government Finance Professionals Conference
3. Planning and delivery of services and infrastructure
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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)
28 February 2014 ▌ Local Government Finance Professionals Conference
4. Measuring and communicating performance
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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)
28 February 2014 ▌ Local Government Finance Professionals Conference
Learning from other audits
VAGO reports are a resource:
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Even audits of agencies outside your sector are relevant
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Themes discussed come from across all of government
Make the most of the state’s investment in audit:
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Use a VAGO report to carry out a self-assessment
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Use VAGO’s reports to inform your risk management.
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28 February 2014 ▌ Local Government Finance Professionals Conference
Upcoming audit activity in the sector
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Annual Plan 2014-15 due June 2014
• Two-year plan of performance audit topics and financial
audit areas of focus
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Financial audit 2013-14
• Strategies being issued in coming months
• Areas of focus: management of grants, management of
creditors
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Performance audits
• Shared services in local government (due May 2014)
28 February 2014 ▌ Local Government Finance Professionals Conference
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
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28 February 2014 ▌ Local Government Finance Professionals Conference
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
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