Audit Committees for Small Councils – Value or Not?

Whilst the Queensland Audit Office sees them as an integral part of the internal audit function of local government, the current legislation permits Audit Committees for small councils to be optional. This is a strange side-effect of the system whereby the mandate to maintain an Audit Committee is decided by the category assigned to the local government for the purposes of determining the remuneration of its elected members.

Categorising Councils for Audit Committee purposes.

The Local Government Act 2009 establishes the Local Government Remuneration and Discipline Tribunal to set these categories based on a formula which takes into account:

  1. the size, and geographical and environmental terrain, of local government areas;
  2. the population of local government areas, including the areas’ demographics, the spread of population serviced by the local governments and the extent of the services the local governments provide.

and any other matters the tribunal considers relevant to the effectiveness, efficiency and sustainability of local governments.

Audit committees for small councilsThe Local Government Regulation 2012 defines large local governments to be those assigned to the Tribunal’s remuneration band Category 3 or higher. Following the further amalgamations and boundary changes of 2012 the Tribunal’s categorisation placed 38 councils (49% of the State’s local governments) in the optional class. Reconsidering the categorisation in 2013 the Tribunal removed all those Councils into Category 3, thus effectively making Audit Committees mandatory for all local governments in the State. The latest Queensland Audit Office Report to Parliament revealed that only 2 had NOT established an Audit Committee by 31st of March 2016.

For the year commencing 1st July 2016 the Tribunal has again re-allocated its categories and now 49 councils have been reclassified into the “optional” Audit Committee status.

Deciding on Audit Committees for Small Councils

 government-audit-boston-maThe councils that most need to think about the issue are those at the margins of Category 2 and Category 3 because, depending on the Tribunal’s calculation at any point of time they may slip from the optional to mandatory Audit Committee requirement or vice versa. However recent history cited above would suggest that the number of Councils impacted from year to year may vary widely and changes may even engulf Category 1 councils. Those moving from mandatory to optional should consider whether abandoning their Audit Committee will reduce confidence in the organisation’s financial reporting,  risk management and corporate governance. Some considerations worthy of evaluation might include: 

  • the council’s recent record of issues of concern raised in audit or internal audit reports;
  • the capacity of the council’s organisation to provide strong internal control systems; and
  • the extent of risk management experience and expertise in the organisation’s administration.

The real question that is worth considering is whether the mandating of Audit Committees should be unlinked from the categorisation of councils for elected member remuneration purposes. Surely councils should be afforded greater certainty as to their obligations rather than a system that can conceivably alter their status from year to year.   

Support for Audit Committees by the QAO

The Queensland Auditor-General (QAG) acknowledges that well-functioning Audit Committees demonstrably enhance audit performance. The QAG sees a direct positive correlation between the effectiveness of Audit Committees and the extent of control and financial reporting issues identified in their annual report to Parliament. There is also evidence of a link between the prevalence of audit issues and the instability of senior management in local government, in the context of the numerous changes in CEO positions since the 2012 local government elections.

 “An effective internal control framework needs competent oversight. An effective audit committee provides a Council with added confidence in its organisations financial reporting, internal controls, risk management, legislative compliance and audit functions.” – Qld Auditor –General [Reference- Page 5- Results of audit: Local government entities 2014-15- Report 17: 2015-16]

Article by Graham Webb PSM

 

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