Agenda of Audit Committee - 11 October 2016

Agenda – Audit Committee Meeting 11 October 2016 Page 6 of 7

5. ReportS of Officers

5.1 ANNUAL FINANCIAL REPORT & AUDIT REPORT 2015/2016

LOCATION/ADDRESS: Nil

APPLICANT: Nil

FILE: FRE02

AUTHOR: Coordinator Financial Services

CONTRIBUTOR/S: Manager Financial Services

RESPONSIBLE OFFICER: Director Corporate Services

DISCLOSURE OF INTEREST: Nil

DATE OF REPORT: 6 October 2016

SUMMARY: The Audit Committee is required to consider and recommend to Council, the adoption of the annual financial report, examine the audit and management reports, and review the report prepared by the Chief Executive Officer.

BACKGROUND

Previous Considerations

Nil

Pursuant to Section 7.9 of the Local Government Act 1995 (LGA), an Auditor is required to examine the accounts and annual financial report submitted by a local government for audit. The Auditor is also required, by 31 December following the financial year to which the accounts and report relate, prepare a report thereon and forward a copy of that report to:

(a) Mayor or President; and

(b) The Chief Executive Officer; and

(c) The Minister

Furthermore, in accordance with Regulation 10(4) of the Local Government (Audit) Regulations 1996 (Audit Regulations), where it is considered appropriate to do so, the Auditor may prepare a Management Report to accompany the Auditor’s Report, which is also to be forwarded to the persons specified in Section 7.9 of the LGA.

On finalisation of the Shire’s 2015/2016 final audit, the Auditors presented their initial findings to the Audit Committee for consideration at an informal briefing session held Wednesday 21 September 2016 which was attended by Shire President Ron Johnston and Councillor Desiree Male.

The Audit Committee is required to examine the reports of the auditor after receiving a report from the Chief Executive Officer (CEO) on the matters reported and:

· Determine if any matters raised require action to be taken by the local government; and

· Ensure that appropriate action is taken in respect of those matters.

The Audit Committee is also required to review a report prepared by the CEO on any actions taken in respect of any matters raised in the report of the auditor and presents the report to Council for adoption. A copy of the report is to be forwarded to the Minister prior to the end of the next financial year or 6 months after the last report prepared by the auditor is received, whichever is the latest in time.

An analysis of the 2015/2016 operating result is provided in this report and how it compares to the forecasted outcomes of the Shire’s adopted Integrated Planning and Reporting Framework. As a background, the 2015/2016 Annual Financial Report discloses the results of the fourth year of implementation of the newly legislated Integrated Planning and Reporting Framework. The plans contained in the framework provide funding strategies to ensure Council can meet its adopted strategic objectives, while maintaining and forecasting impacts on the Shire’s future financial sustainability.

As reported to Council in the three preceding years in regards to the 2012/2013, 2013/2014 and 2014/2015 Annual Financial Reports, the Shire’s 2015/2016 Annual Budget process continued to place significant focus on a number of ‘informing strategies’. As part of the budget finalisation it was still evident in the fourth year since the introduction of the integrated planning framework, that the desired allocations toward capital renewal outlined within the 2013 Asset Management Plans are not being achieved.

The draft 2016-2030 Shire of Broome Long Term Financial Plan and draft Strategic Community Plan 2015-2025 and Corporate Business Plan 2015-2019 were presented to Councillors at workshops held in February 2015 which informed the 2015/2016 annual budget process. The SCP and CBP were adopted at the SMC held 19 February 2015, including the organisational restructure which resulted in $1.8M savings in employee costs per annum. The revised 2015-2030 LTFP was received by Council at the Special Meeting of Council (SMC) held 13 August 2015 along with adoption of the 2015/2016 annual budget.

The Shire’s LTFP was reviewed in December 2015 and again in May 2016 to inform the 2016/2017 budget process and the desk top review of the 2016/17 Corporate Business Plan. The Shire’s Asset Management Plans are currently undergoing a full review as part of the full integrated planning framework review.

The Audit Committee is requested to consider and recommend adoption of the annual financial report to Council.

COMMENT

Chief Executive Officer’s Report to the Audit Committee

Following is the CEO’s report to the Audit Committee on matters arising from the audit and management reports. Extracts from the audit and management reports are indented in italics.

Audit Report

There were no matters of statutory non-compliance reported.

Management Report

The Auditor’s Management Report provides an overview of the approach undertaken in respect of the annual audit process and the associated outcomes of the audit. The Management Report also identifies any findings that, whilst generally not material in relation to the overall audit of the financial report, are considered relevant to the day to day operations of the Shire.

1. Matters Identified

There were no issues identified.

The Auditor provided comment on the Shire’s ratios, in particular the impact of the revaluation of infrastructure assets conducted during the year ended 30 June 2015 on the Asset Sustainability Ratio. 2015/2016 is the first full year of operations since the revaluation and the full impact of the increase in depreciation was realised.

Management is identifying strategies to address the concerns relating to the condition assessment and remaining useful life which contributed to the higher level of depreciation.

The Auditor’s comments on ratios is specifically discussed within the Management Report, as appended to the 2015/2016 Annual Financial Report as Attachment 2 to this report.

2. Audit Adjustments

Following the presentation of the Draft 2015/2016 Financial Report to the Auditor, officers actioned one amendment for an accrued liability in line with materiality risks.

3. Other Matters

There were no identified matters of fraud to report and there were no disagreements with management about significant accounting matters.

2015/2016 Operating Result

The financial year ended 30 June 2016 resulted in the following carried forward operating surplus:

$ 601,252 Budgeted 2015/2016 operating surplus (as per 2016/2017 adopted annual budget)

$1,691,093 Actual 2015/2016 operating surplus

Note, this surplus is exclusive of non-cash transactions such as depreciation and the effects of asset revaluation gains or losses.

The year end operating surplus result for 2015/2016 occurred through a number of factors. $730K is attributable to projects or activities which were not complete as at 30 June 2016 and are proposed to be carried forward into 2016/2017.

Other factors include a number of budget analysis and reviews to realise organisational savings across the Shire. These include savings in fringe benefits tax and other employee expenses (other than wages) of $246K and unspent materials and contracts across primarily operating activities/projects of $580K. Savings in utilities of $87K include anticipated increases in electricity utilities which did not occur as previously estimated and implementation of public open space strategies to reduce water usage. Savings of $109K in plant repairs, parts, fuel and tyres which was primarily the result of anticipated fuel increases not occurring. Interim and back rates have sourced additional rates revenue of $46K as developments have finalised, and reviews of non-rateable properties in the Shire’s database have been undertaken. Additional interest revenue of $41K was earned in the period.

However, these savings were offset by a number of target shortfalls in income. These include $307K in fees and charges revenue from pool inspections, Civic Centre venue user charges, Haynes Oval and Pavilion usage, power reimbursements for the use of Father McMahon Sports field and statutory building and application fees, as well as a shortfall in projected rental income from staff housing and the reimbursement of income previously raised for the Telstra Broome West Site Depot in 2014-15.

The 2016/2017 Annual Budget that was adopted at the Ordinary Meeting of Council held 30 June 2016, adopted an estimated brought forward operating surplus of $601,252. This was comprised of a number of operating and capital projects which are detailed in Attachment 3.

The estimated budgeted surplus was calculated prior to the close of financial year processing. The actual brought forward surplus for these projects, as adjusted for final actual expenditure or income is $595,760.

A further $134,855 of the carried forward surplus pertains to operating activities or capital projects which were not completed as expected, by 30 June 2016. These projects or operational activities are listed in Attachment 4. The amounts represent expenditure committed prior to 30 June 2016 either by executed contract or purchase orders, where work was not completed or supplier invoices not received, by close of financial year processing.

It is recommended that $395,053 of the surplus be utilised for those operational activities or capital projects listed in Attachment 5. The proposed items mainly pertain to expected additional legal expenses which have arisen as a result of recent events and $150,000 for engineering consultants.

In relation to the additional expenditure for engineering consultants, it is proposed to adjust the timing of the initial design work for infrastructure projects to allow better timing of delivery within the financial year. Major infrastructure projects can not commence until detailed plans and designs have been completed. Currently, our budget process includes the design and construction phase within the same financial year. Not being able to commence the design phase until adoption of the budget, most often means that the project is not ready to commence actual construction until after the completion of the wet season. It also means that the Shire is not prepared when opportunities arise for additional grant funding. Having projects ‘ready on the shelf’ will allow the Shire to react quickly to such opportunities.

It is proposed that $150,000 of the surplus funds go towards design of future infrastructure projects (in line with the Shire’s Corporate Business Plan and Strategic Community Plan). A detailed design proposal also allows for more accurate costings for construction, so preparing the design in advance of the budget year of construction, will ensure more accurate budgeting.

It is recommended that the balance of unallocated funds of $565,425 be transferred to reserves.

It is proposed that $150,000 be transferred to the Plant Reserve for the specific purpose of funding the purchase and installation of a generator for the Shire Administration Building. Business interruption was a key risk factor in the development of the Shire’s Business Continuity Plan (BCP) which is currently being finalised. An expectation exists within the community and state government that the Shire would lead any recovery from a disaster event, however one of the major factors impacting the Shire’s ability to provide that support is the lack of backup power required to get business systems online as soon as possible after a disaster event. The purpose of the original electrical access upgrade at the Administration building was to enable an externally sourced back up generator to be mobilised in case of a disaster event. However, there are some limitations with this approach due to the availability from the supplier and the capacity to only support limited areas within the building. Therefore, the provision is proposed as a risk mitigation strategy as part of the finalisation of the Business Continuity Plan to be considered.

It is recommended that the balance of $415,425 be transferred to the Building Reserve to offset and reduce the anticipated borrowings required for the construction of the new Kimberley Regional Offices (KRO) building.

The 2016/2017 budget for the KRO construction (adjusted for 2015/2016 final actual expenditure) is as follows:

2016/2017 Budgeted Funding Source

2016-17 Estimated Total Expenditure

Building Reserve

Restricted Cash Reserve (Prior years unspent allocation)

Loan

KRO 3 Building Construction

$5,960,277

$1,620,000

$250,277

$4,090,000

The proposed reserve provision would further reduce the loan component to $3,674,575.

A summary of the recommended surplus allocation is as follows:

SUMMARY OF 2015-16 Surplus
2015-16 TOTAL REPORTED SURPLUS	1,691,093
Recommended allocation of surplus funds:
Carry over as per adopted budgeted (Adjusted for final 2015-16 actuals) Attachment 3	595,760
Additional carry over (represents expenditure committed prior to 30 June 2016 either by contract or purchase orders, where work was not completed or invoicing not received by close of Financial Year) Attachment 4	134,855
Expenditure not committed as at 30 June 2016, but recommended use of surplus funds for specific projects or operational requirements. Attachment 5	395,053
Sub-total specified carryover	1,125,668
Total Surplus remaining	565,425
RECOMMENDED RESERVE TRANSFERS
Building Reserve - KRO	415,425
Plant Reserve – BCP actions	150,000

Revaluation of Shire Assets (Fair Value)

In accordance with regulation 17A of the Local Government (Financial Management) Regulations 1996, the Shire must value all assets at fair value and revalue all assets every 3 years. Fair value requirements came into effect in the year ended 30 June 2013. The Shire is now in the second round of fair value revaluations with the three year cycle recommencing in the 2015/2016 financial year for the revaluation of plant and equipment assets.

The initial fair value valuation for plant and equipment in 2012/2013 resulted in a decrement (or loss) which was shown in the profit and loss of the annual report. The revaluation of plant and equipment for 2015/2016 resulted in an increase to the fair value. In accordance with AAS accounting standards this increment must first be offset against any prior year decrement (or loss) and any credit balance is then to go to revaluation reserve. The increment recognised in 2015/2016 of $325,066 did not fully offset the prior year revaluation loss.

ADJUSTMENTS TO PRIOR YEARS ANNUAL REPORTS

Following completion and acceptance of the final audited 2014/2015 annual report, it was brought to the Shires’ attention by the Department of Local Government and Communities, that the reported treatment of the fair value valuation of all other assets which occurred in 2014/2015 was incorrect.

For the year ended 30 June 2015, the Shire was required to value all other asset classes at fair value. i.e. those assets that did not fall under the classes of plant and equipment or land and buildings.

The result of the valuation was an increment to each of the classes of ‘Roads’, ‘Carparks, footpaths and bridges’, ‘Drainage Infrastructure’ and ‘Other Infrastructure’ totalling $208,565,314 and a decrement to the asset class ‘Recreation Infrastructure’ of $(8,022,651). The combined impact was an increase in value of $200,542,663. The overall total increment across all the classes combined, was reported in the Statement of Comprehensive Income as an increment to the revaluation surplus. This was incorrect. The decrement for the class ‘Recreation infrastructure’ of $(8,022,651) should have been reported separately in the statement of comprehensive income (profit and loss).

A prior year adjustment was completed as part of the 2015/2016 annual report preparation to rectify this error. The recognition of the decrement through the profit and loss has no impact on the carried forward surplus which is calculated excluding non-cash items.

Further adjustments were made to 2014/2015 reports in relation to the categorisation of utility expenses and reimbursements. Telephone expenses have previously been reported under the nature and type of utility expenses when they should have been categorised as materials and contracts. Similarly, reimbursements have previously been reported as operating grants, subsidies and contributions when they should have been reported as other revenue. The 2015/2016 report has been prepared with the correct categorisations and adjustments were made to the report for 2014/2015 for comparative purposes. There is nil impact to the net result.

CONSULTATION

Nil

STATUTORY ENVIRONMENT

Local Government Act 1995

6.4. Financial report

(1) A local government is to prepare an annual financial report for the preceding financial year and such other financial reports as are prescribed.

(2) The financial report is to —

(a) be prepared and presented in the manner and form prescribed; and

(b) contain the prescribed information.

(3) By 30 September following each financial year or such extended time as the Minister allows, a local government is to submit to its auditor —

(a) the accounts of the local government, balanced up to the last day of the preceding financial year; and

(b) the annual financial report of the local government for the preceding financial year.

7.9. Audit to be conducted

(1) An auditor is required to examine the accounts and annual financial report submitted for audit and, by the 31 December next following the financial year to which the accounts and report relate or such later date as may be prescribed, to prepare a report thereon and forward a copy of that report to —

(a) the mayor or president; and

(b) the CEO of the local government; and

(c) the Minister.

(2) Without limiting the generality of subsection (1), where the auditor considers that —

(a) there is any error or deficiency in an account or financial report submitted for audit; or

(b) any money paid from, or due to, any fund or account of a local government has been or may have been misapplied to purposes not authorised by law; or

(c) there is a matter arising from the examination of the accounts and annual financial report that needs to be addressed by the local government, details of that error, deficiency, misapplication or matter, are to be included in the report by the auditor.

(3) The Minister may direct the auditor of a local government to examine a particular aspect of the accounts and the annual financial report submitted for audit by that local government and to —

(a) prepare a report thereon; and

(b) forward a copy of that report to the Minister,

and that direction has effect according to its terms.

(4) If the Minister considers it appropriate to do so, the Minister is to forward a copy of the report referred to in subsection (3), or part of that report, to the CEO of the local government to be dealt with under section 7.12A.

7.12A. Duties of local government with respect to audits

(1) A local government is to do everything in its power to —

(a) assist the auditor of the local government to conduct an audit and carry out his or her other duties under this Act in respect of the local government; and

(b) ensure that audits are conducted successfully and expeditiously.

(2) Without limiting the generality of subsection (1), a local government is to meet with the auditor of the local government at least once in every year.

(3) A local government is to examine the report of the auditor prepared under section 7.9(1), and any report prepared under section 7.9(3) forwarded to it, and is to —

(a) determine if any matters raised by the report, or reports, require action to be taken by the local government; and

(b) ensure that appropriate action is taken in respect of those matters.

(4) A local government is to —

(a) prepare a report on any actions under subsection (3) in respect of an audit conducted in respect of a financial year; and

(b) forward a copy of that report to the Minister, by the end of the next financial year, or 6 months after the last report prepared under section 7.9 is received by the local government, whichever is the latest in time.

5.54. Acceptance of annual reports

(1) Subject to subsection (2), the annual report for a financial year is to be accepted* by the local government no later than 31 December after that financial year.

* Absolute majority required.

(2) If the auditor’s report is not available in time for the annual report for a financial year to be accepted by 31 December after that financial year, the annual report is to be accepted by the local government no later than 2 months after the auditor’s report becomes available.

Local Government (Audit) Regulations 1996

10. Report by auditor

(4) Where it is considered by the auditor to be appropriate to do so, the auditor is to prepare a management report to accompany the auditor’s report and to forward a copy of the management report to the persons specified in section 7.9(1) with the auditor’s report.

Local Government (Financial Management) Regulations 1996

17A Assets, valuation of for financial reports etc.

(1) In this regulation —

fair value, in relation to an asset, means the fair value of the asset measured in accordance with the AAS.

(2) Subject to subregulation (3), the value of an asset shown in a local government’s financial reports must be the fair value of the asset.

(3) A local government must show in each financial report —

(a) for the financial year ending on 30 June 2013, the fair value of all of the assets of the local government that are plant and equipment; and

(b) for the financial year ending on 30 June 2014, the fair value of all of the assets of the local government —

(i) that are plant and equipment; and

(ii) that are —

(I) land and buildings; or

(II) infrastructure;

and

(c) for a financial year ending on or after 30 June 2015, the fair value of all of the assets of the local government.

(4) A local government must revalue all assets of the local government of the classes specified in column 1 of the Table to this subregulation —

(a) by the day specified in column 2 of the Table; and

(b) by the expiry of each 3 yearly interval after that day.

Table

Class of asset	Day
Plant and equipment	30 June 2016
Land, buildings and infrastructure for which the fair value was shown in the local government’s annual financial report for the financial year ending on 30 June 2014	30 June 2017
All other classes of asset	30 June 2018

(5) A revaluation under subregulation (4) must be based on the value of the asset as at a time that is as close as possible to the day by which the revaluation is due.

POLICY IMPLICATIONS

2.1.1 - Materiality in Financial Reporting

2.1.4 - Significant Accounting Policies

FINANCIAL IMPLICATIONS

In terms of materiality, the unallocated surplus amount of $960,478 (surplus excluding the committed expenditure of Attachment 2 and 3) represents a variance of 2.56% compared to budgeted operating revenue for 2015/2016 of $37,524,433 (excluding non-operating grants and contributions for assets and profit on sale of assets). This is 1.56% over the adopted threshold of 1% ($375,244) as per policy 2.1.1 Materiality in Financial Reporting.

RISK

The audited Annual Financial Report is a key control measure used to report to Council and its stakeholders to provide assurance that all systems, processes and controls have been established by the CEO to minimise the risk of any material misstatement or loss caused by fraud or error. The audit findings indicate areas requiring improvement and management have implemented measures to review processes. The report measures Council’s financial capacity to achieve its adopted strategic and operational objectives. A material variance indicates areas requiring investigation such as budget estimation/formulation, workforce management and Council’s overall resource capacity to achieve its strategic objectives.

The recommendation by the Audit Committee to Council for the adoption of the Annual Financial Report, Audit and Management Report and CEO’s report is a key statutory compliance matter. Should this not be recommended for adoption, this will cause a delay in Council’s adoption of the 2015/2016 Annual Report to be presented at the October Ordinary Meeting of Council, which will flow on to delaying the Annual Electors Meeting (AEM). This poses a high risk due to the possible likelihood of occurring and the impact of a significant delay to major deliverables.

In regards to the proposed allocation of the 2015/2016 surplus, should the Audit Committee make alternative recommendations, the long term financial impacts of such should be analysed to ensure there are no adverse impacts to Council’s future financial sustainability and should be in line with the adopted LTFP. In line with Council’s risk ratings, the risk is assessed as extreme where the financial impact is greater than $150,000 and the likelihood of this occurring is possible. To mitigate these risks, the report recommendations are required to be adopted.

STRATEGIC IMPLICATIONS

Our People Goal – Foster a community environment that is accessible, affordable, inclusive, healthy and safe:

Encourage communication.

Identify affordable services and initiatives to satisfy community needs.

Our Prosperity Goal – Create the means to enable local jobs creation and lifestyle affordability for the current and future population:

Encourage the provision of affordable land for residential, industrial, commercial and community use.

Our Organisation Goal – Continually enhance the Shire’s organisational capacity to service the needs or a growing community:

Develop an organisational culture that strives for service excellence.

Review and analyse strategic and operational plans.

Manage resource allocation.

Manage staff attraction and retention.

Improve systems, processes and compliance.

VOTING REQUIREMENTS

Absolute Majority

REPORT RECOMMENDATION:

That Council on recommendation from the Audit Committee:

1. Receives the Chief Executive Officer’s report relating to the audit.

2. Receives the Audit Report and Audit Management Report dated 4 October 2016.

3. Adopts the Annual Financial Report for the year ended 30 June 2016.

4. Allocates the net operating surplus from the 2015/2016 financial year as per Attachment 3, 4 and 5 with the balance of $565,425 to be transferred to reserves as follows:

a) $415,425 to Building Reserve - for the purpose of offsetting proposed loan funding for the new KRO building;

b) $150,000 to Plant Reserve – for the purpose of Business Continuity Plan action.

(Absolute Majority Required)

Attachments

1.	2015-2016 Annual Financial Report
2.	2015-2016 Audit Management Report
3.	2015-2016 Surplus - Budgeted Carryover
4.	2015-2016 Surplus - Carryover Additional
5.	2015-2016 Surplus - Recommended Allocation