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House of Assembly - Fifty-First Parliament, Second Session (51-2)
2007-11-22 Daily Xml
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LOCAL GOVERNMENT (AUDITOR-GENERAL) AMENDMENT BILL

Second Reading

Adjourned debate on second reading.

(Continued from 31 May 2007. Page 238.)

The Hon. J.M. RANKINE (Wright—Minister for State/Local Government Relations, Minister for the Status of Women, Minister for Volunteers, Minister for Consumer Affairs, Minister Assisting in Early Childhood Development) (11:01): Sections 128 to 130 of the Local Government Act 1999 (which are substituted in this bill put forward by the member for Fisher) deal with the annual audit of a council's financial statements. Currently, registered company auditors audit the annual financial statements of councils under contract to each council, applying the relevant audit and accounting standards. Councils' annual reports, including the audited financial statements, must be available for public inspection and must be submitted for tabling in both houses of parliament.

The task of the external auditor includes providing an audit opinion in respect of the audited financial statements. In forming that audit opinion, the auditor must give due consideration to the adequacy of the council's policies, practices and procedures of internal control under section 125 of the Local Government Act 1999. The council auditor must provide a report to the council and the council's audit committee specifically identifying any irregularity in the council's accounting practices or the management of the council's financial affairs identified during the course of an audit.

Under the present framework for external financial review of councils, there are lines of accountability back to the parliament through the minister responsible for the administration of the Local Government Act. Under the act, the auditor must report to the minister a failure by the council or chief executive officer to rectify within a reasonable time, or in a reasonable manner, any irregularity identified by the auditor during the course of an audit or a breach of the Local Government Act, or another act that comes to the attention of the auditor during the course of an audit, or evidence that, in the opinion of the auditor, indicates or suggests a serious financial irregularity. Sir, can I have clarification of the time? The clock keeps chopping and changing around.

The SPEAKER: Eight minutes—my apologies.

The Hon. J.M. RANKINE: Okay, thank you. Is that a guesstimate?

The SPEAKER: You had 10 minutes at the beginning.

The Hon. J.M. RANKINE: After receiving the report under section 129(6), the minister may appoint an investigator who may be the Auditor-General. The Public Finance and Audit Act 1987 gives the Treasurer the power to request that the Auditor-General examine the accounts of a council and the efficiency and economy of its activities, or examine accounts relating to a council-funded project and the efficiency and cost-effectiveness of that project. The results of any such examination are reported to the Treasurer and to the presiding members of both houses of parliament.

Under section 273 of the Local Government Act 1999, the minister may take action on the basis of a report to the Auditor-General under the Local Government Act, or the Public Finance and Audit Act, or the report of another investigator appointed by the minister to investigate matters raised by a council auditor. The minister may make recommendations to the council or, if the minister considers a contravention, failure or irregularity has occurred, give directions to the council to rectify it or prevent a recurrence.

If there has been a serious contravention, failure or irregularity, the minister may recommend to the Governor that the council be declared a defaulting council and the Governor may then (by proclamation) declare the council to be a defaulting council and appoint an administrator. All members of the defaulting council are then suspended from office. The minister must report to both houses of parliament on the circumstances giving rise to making of the proclamation. I accept that, historically, it has been very rare for matters to reach the point of investigation or review by the Auditor-General and for a minister to subsequently take formal action.

In introducing his bill, the member for Fisher referred to the Port Adelaide Flower Farm. This was one case in which the Auditor-General was called on by the Treasurer of the day to conduct an examination under section 32 of the Public Finance and Audit Act. However, generally I think it is fair to say that, in South Australia, we have not experienced the problems with local councils for which some other states are renowned.

Recent changes made to the arrangements for local government financial audit by the government recognised that South Australia did not have a clear, up-to-date financial framework to support local government audit and to achieve consistency across councils in financial reporting and had one of the weaker auditor independent regimes for the local government sector.

Amendments made by the Local Government (Finance Management and Rating) Amendment Act 2005 and the Local Government (Financial Management Variation) Regulations 2007 have focused on improving the independence of council external auditors in a range of ways, including a requirement that a council auditor must be rotated after no more than five years and that a council must report both the amounts paid to the auditor and, if applicable, the reasons for terminating an auditor's appointment; prohibiting the council from engaging its auditor to provide any services to the council outside the scope of the auditor's functions under the Local Government Act; and requiring both the council CEO and the presiding member of the council's audit committee to sign a statement to certify the auditor's independence, and requiring the auditor (himself or herself) to sign a further declaration of independence consistent with industry standards.

Model annual financial statements for councils and council subsidiaries developed in accordance with Australian accounting standards have also been prescribed. The member for Fisher points out that it has been difficult to make any kind of financial comparison between councils, and the model statements will go some way towards rectifying this. Also, comparison of each council's finances have been enhanced by the new requirement under local government financial management regulations that council budgets include a summary of operating and capital investment activities prepared on a consistent basis, as well as the requirement that information on standard financial indicators be presented.

In his 2006 annual report the former auditor-general said:

It is relevant to note that there is a sound foundation for effective management and control in the Local Government Act 1999 and the regulations under that act.

He acknowledged that significant improvements to the financial management, auditing and reporting arrangements within local government have been made in the recent amendments prescribed in the Local Government Act 1999 and the Local Government Financial Management Regulations 1999. However, in that report and in evidence before the Economic and Finance Committee in December 2006, the former auditor-general also raised questions about the ability of the current framework for local government audit to provide a positive, comprehensive, independent assurance of the propriety and lawfulness with which councils are administering public funds under the powers delegated to them by parliament.

As a result of these concerns, the Economic and Finance Committee conducted an inquiry into local government audit and oversight and, as I stated in my submission to the committee in May 2007, I have no in-principle objection to the proposal that the Auditor-General should have a greater role in the audit of local government. On the contrary, I believe that such a role for the Auditor-General would be consistent with the standing of councils as elected governments.

However, it is not necessarily appropriate to subject local government to exactly the same audit requirements as a state government department under the Public Finance and Audit Act. Some work is required to frame reforms that take the nature of local government and its evolving financial management framework into account. In my discussion with the former auditor-general in late 2006, he acknowledged that a range of factors impact on local councils that do not apply to state government departments.

The Economic and Finance Committee reported on its inquiry in June this year with a range of recommendations that need to be taken into account in considering whether this bill introduced in May is in the most effective form. The committee in a footnote on page 34 of its report noted that this bill was before the house and, while expressing agreement with its intent, pointed out that the committee's recommendations enumerate a range of options and improvements that can accompany it.

Those options and improvements relate to fundamental matters such as alternative models for the way in which the Auditor-General could be involved in local government audit, the scope of the audits to be undertaken, and the form of the reports to be produced, all of which affect the costs of any new regime. There are different models of Auditor-General involvement in the local government audit operating in Victoria, Queensland and Tasmania, and the options to be examined for South Australia need to consider at least the two alternatives contained in the recommendations of the Economic and Finance Committee.

The interrelated issues in the form of Auditor-General involvement, audit scope, cost and transitional provisions need to be resolved so that any new reforms will be widely understood and successfully implemented. The local government sector is not opposed to greater involvement of the Auditor-General and, if changes are to be developed and implemented in a considered way, councils and, particularly council members, will appreciate the benefits of the Auditor-General's involvement rather than experiencing it as punitive. Although the government will not be supporting this measure at this time, I welcome its reinforcement of the message to local government that further reforms in this area are warranted.

Time expired.

Mr GRIFFITHS (Goyder) (11:11): I wish to make a brief comment on this and also thank the minister for her contribution. The issue of local government audits is a very emotional one for many people. In my time as a member of the Economic and Finance Committee, in the first 12 months especially, I think we spent far too much time talking about local government in general. However, a lot of time was devoted to the inquiry, which I think was very well spent, and, as the minister commented, we had input from the former auditor-general and came up with some very worthwhile recommendations, and I am pleased to hear that the minister is considering all of those.

The minister has given an excellent précis of how the local government audit process occurs so it is not my intention to repeat that, but I want to comment briefly, because probably I am one of the few people in this place who has had to experience local government audits on a regular basis. I was not directly involved in the preparation of the financial statements and accounts for the last couple of years of my time in local government, but for about 10 years before that I had sole responsibility, and my understanding from the elected members who put me there was that they expected everything was going to be right all the time, and that is what I tried to achieve. I know the experience I had in working with three different audit companies was that they are very thorough in doing their jobs. They try to ensure, as much as humanly possible, that every dollar is correctly allocated as per the budget determined by the elected members, and that only appropriate accounts have been paid and every source of revenue has been allocated to its correct budget line, so that things are right.

I am rather intrigued, because it seems to me there is a lot of discussion about local government auditing. In the comments that I made in the Economic and Finance Committee, I tried to enforce the fact that all councils work within the regulations that are determined by the government—clearly. So, if people are unhappy about audit requirements for local government, it is actually necessary for the minister and the government to determine what those regulations and audit requirements should be. That is where the report of the Economic and Finance Committee on local government audit and oversight will assist.

My comment during the committee discussions was that councils I have a knowledge of all do the right thing. They have no fear about an external body coming in and auditing their budgets or end of year statements, because there is no misrepresentation. Sometimes minor adjustments need to be made where something has been considered incorrectly, but that is because the auditor picks it up. It is not because funds have been misappropriated or used in the wrong way; it is just that they have been put on the wrong line sometimes, so I do not think that is a real issue.

I commend the fact that, of the 68 councils across the state, numerous audit committees have been put in place and they have tried to get the particular expertise and skill that they need to ensure that the regular control of the budget and finances is undertaken by those committees. No doubt those committees also have a significant involvement in the preparation of the final accounts for audit by the auditor and subsequent presentation to the minister and the government.

I know that in local government, generally, there is a little concern about this issue. I think that all the professional staff who work in the 68 councils these days have the required skills and expertise to ensure that they can undertake any requirements put before them. I understand that the Local Government Association is still uncertain in relation to its position on this bill. The member for Fisher has commented to me that he has had recent discussion with the LGA and that it is looking for comparative costings and what might be involved, if his bill receives support.

The Local Government Association is consulting councils, so I am sure a position from them will be received quite soon in order to allow this bill, and also the recommendations to the minister from the Economic and Finance Committee, to be considered appropriately. I do not think there is great reason for concern in this bill, and we will see what happens in the future.

Debate adjourned on motion of Mrs Geraghty.

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