Supplementary Agenda of Ordinary Meeting

Agenda – Ordinary Meeting of Council 19 October 2017 Page 5 of 6

12. Business of an Urgent Nature

12.1 MINUTES OF THE AUDIT COMMITTEE MEETING HELD 16 OCTOBER 2017

LOCATION/ADDRESS: Nil

APPLICANT: Nil

FILE: FRE02

AUTHOR: Acting Director Corporate Services

CONTRIBUTOR/S: Nil

RESPONSIBLE OFFICER: Director Corporate Services

DISCLOSURE OF INTEREST: Nil

DATE OF REPORT: 16 October 2017

SUMMARY: This report presents to Council the minutes of the Audit Committee Meeting held 16 October 2017 for receipt and endorsement of the Audit Committee’s recommendation to adopt the 2016/2017 Annual Financial Report, the Audit and Management reports, and the report prepared by the Chief Executive Officer for the financial year ended 30 June 2017. Additionally, Council is requested to endorse the proposed allocation of the net operating surplus from 2016/2017.

The report also presents Audit Committee recommendations in relation to the Better Practice Review Report prepared by the Department of Local Government and Communities.

BACKGROUND

Previous Considerations

Nil

Department of Local Government and Communities Better Practice Review Program

The Local Government Better Practice Review (BPR) Program is an initiative undertaken by the Department of Local Government and Communities (DLGC) to recognise and promote good practice in Western Australian country local governments. The BPR Program is part of the State Government’s Country Local Government Fund (CLGF) Capacity Building Program.

The program has been designed to acknowledge areas of better practice whilst encouraging improvement in the way local governments conduct their activities to ensure good governance and build the capacity of the local government sector.

Whilst the BPR report addresses some legislative requirements, it is important to note that this is not a compliance exercise, and feedback is focused on recognising current better practice, as well as building the capacity of the Shire to achieve better practice across a range of operations into the future.

Officers initially completed a self-assessment checklist and provided detailed information and documentation to the DLGC. An onsite review was conducted in May 2016 where Department officers met with identified Shire of Broome staff and concluded by attending the Ordinary Meeting of Council held 26 May 2016.

Annual Financial Report & Audit Report 2016/2017

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 2016/2017 final audit, the Auditors presented their initial findings to the Audit Committee for consideration at an informal briefing session held Wednesday 6 September 2017, which was attended by Acting Shire President Harold Tracey and Councillor Desiree Male.

The signed Auditor’s Report was received dated 3 October 2017. On 16 October 2017, the Audit Committee examined the reports of the auditor after receiving a report from the Chief Executive Officer (CEO) on the matters reported and:

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

· Ensured that appropriate action is taken in respect of those matters;

· Reviewed the reports prepared by the CEO on any actions taken in respect of any matters raised in the report of the auditor; and

· Recommended the audited financial report to Council for adoption.

A copy of the audited financial report is to be forwarded to the Minister within 6 months of receipt of the Auditor’s Report.

An analysis of the 2016/2017 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 2016/2017 Annual Financial Report discloses the results of the fifth year of implementation of the 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.

The Strategic Community Plan (SCP) 2017-2027 and Corporate Business Plan (CBP) 2017-2021 were adopted by Council at the Ordinary Meeting of Council (OMC) on 15 December 2016 and a revised 2017-2032 Long Term Financial Plan (LTFP) was also received by Council at the December 2016 OMC. The Shire’s LTFP was reviewed in November 2016 to support the review of the SCP and CBP. These plans informed the 2017/2018 annual budget process.

The Shire’s Asset Management Plans are currently undergoing a full review as part of the mandated integrated planning framework review process. This review is expected to be finalised in October with the draft Combined Infrastructure Asset Management Plan presented to Council in November.

COMMENT

Department of Local Government and Communities Better Practice Review Program

The report identifies areas of better practice, strengths and areas for further development under the headings of Governance; Planning and Regulatory; Plan for the Future; Assets and Finance; Workforce Planning and Human Resource Management; and Community and Consultation.

The review found “that the Shire is a high-performing local government which functions well; displaying a positive organisational culture, good governance and an emphasis on continuous improvement and innovation across all parts of the organisation.”

“Although the Shire is performing well, it should be noted there is still room for improvement, and accordingly, areas for further development have been identified through this report.”

“The Shire is commended for the quality and scope of work it has done to date, in addition to the work, and improvements, it looks to undertake, going forward.”

It should be noted that although the review was undertaken in May 2016 the finalised BPR document was only received by the Shire late in May 2017. Delivery of the final document was impacted by the transition of State Government following the caretaker period prior to and during the March 2017 State Election.

Following the election, the new Minister for Local Government issued a letter of acknowledgement to the Shire President congratulating the Council and staff for the high level of better practice at the Shire and commending the organisation’s commitment to innovation. The letter reiterated the comments in the BPR relating to the Shire being a high performing local government with positive culture, good governance and an emphasis on continual improvement and innovation.

The review also provided an action plan identifying areas that the Shire could focus on to further improve operations. These improvements were noted as being “minor in nature” and will be updated and the resulting action plan presented at the next Audit Committee meeting.

Annual Financial Report & Audit Report 2016/2017

Chief Executive Officer’s Report

Following is the CEO’s report 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 Asset Sustainability Ratio and the impact on depreciation resulting from the revaluation of infrastructure assets conducted during the year ended 30 June 2015. The Auditor noted that this ratio has improved in the current year but is still below the five year Regional and State average.

The Auditor also noted the downward trend of the Shire’s Operating Surplus Ratio over the past five years and highlighted that Council and Management will need to consider ways to improve the position by either increasing revenue or decreasing expenditure, or both. It should be noted however, that the higher levels of depreciation as mentioned above, have also impacted this ratio.

The concerns relating to the condition assessment and remaining useful life which contributed to the higher level of depreciation have been addressed in the revised Asset Management Plan due to be presented to Council in November 2017. This will be incorporated in the fair value valuation on infrastructure assets due by 30 June 2018, with the effects realised in the 2018/2019 financial year.

The Auditor’s comments on ratios are specifically discussed within the Management Report, as appended to the 2016/2017 Annual Financial Report.

2. Audit Adjustments

Following the presentation of the draft 2016/2017 Financial Report to the Auditor, there were no amendments required to be actioned.

3. Other Matters

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

2016/2017 Operating Result

The financial year ended 30 June 2017 resulted in the following carried forward operating surplus:

$1,879,323 Budgeted 2016/2017 operating surplus (as per 2017/2018 adopted annual budget)

$3,606,464 Actual 2016/2017 operating surplus

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

The 2017/2018 Annual Budget that was adopted at the Ordinary Meeting of Council held 29 June 2017, adopted an estimated brought forward operating surplus of $1,879,323 from 2016/2017. This was comprised of $1,485,897 Financial Assistance Grants received in advance and the balance of $393,426 comprising estimated surpluses from operating and capital projects that were not completed prior to the close of the financial year as detailed in Attachment 3 of item 5.2 of the Minutes of Audit Committee meeting. 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 $567,138.

A further $17,841 of the carried forward surplus pertains to operating activities or capital projects which were not completed as expected, by 30 June 2017. The amounts represent expenditure committed prior to 30 June 2017 either by executed contract or purchase orders, where work was not completed or supplier invoices not received, by close of financial year processing.

Other factors contributing to the surplus include savings in salaries and wages and fringe benefits tax of $448K, unspent materials and contracts across primarily operating activities/projects of $1.6M, and savings of $30K in plant repairs, parts, fuel and tyres. Additional interest revenue of $152K was earned in the period.

However, these savings were offset by a number of target shortfalls in income. This included a reduction in expected fees and charges income of $76K primarily due to the decline in building and planning activities.

It is proposed that $133,000 of the surplus funds be utilised for those operational activities including business system improvements, minor building works required to the Administration building to accommodate the relocation of the engineering department and to improve access to the BRAC sporting grounds from Frederick St, consistent with funds already committed for other upgrade projects in this precinct in the 2017/2018 budget.

It is proposed that $193,249 of the surplus funds go towards funding the shortfall of Finance Assistance Grants for 2017/2018. On 17 August 2017, advice was received from the WA Local Government Grants Commission, that the final 2017/2018 Financial Assistance Grants allocation had been reduced from previous indications given in May/June 2017. The reduction has affected all Local Governments in WA and was a result of new census data affecting the distribution of allocations to the States. The final allocation was $193,249 less than what had been budgeted in the 2017/2018 Adopted Budget.

It is recommended that the balance of unallocated funds of $1.289M be transferred to reserves.

It is proposed that $331,600 be transferred to the Footpath Reserve for the specific purpose of leveraging grant funding from the Department of Transport for a shared path from Conti Foreshore to Town Beach. The Shire has progressed an expression of interest to a grant proposal stage and if successful, would receive matching grant funds through the Western Australian Bicycle Network grants program.

It is proposed that $250K be transferred to the Road Reserve and Drainage Reserve respectively for renewal, and the balance of $377,739 be transferred to the Public Open Space reserve to offset and reduce proposed borrowings required for the Town Beach Redevelopment Project adopted in the 2017/2018 annual budget.

A summary of the recommended surplus allocation is as follows:

SUMMARY OF 2016/2017 Surplus
2016/2017 TOTAL REPORTED SURPLUS	3,606,464
Carry over FAGS grants received in advance	1,485,897
*Recommended allocation of surplus funds:*
Carry over as per adopted budgeted (Adjusted for final 2016/2017 actuals) - Attachment 3 of item 5.2 of the Minutes of Audit Committee meeting	567,138
Additional carry over (represents expenditure committed prior to 30 June 2017 either by contract or purchase orders, where work was not completed or invoicing not received by close of Financial Year) - Attachment 4 of item 5.2 of the Minutes of Audit Committee meeting	17,841
Expenditure not committed as at 30 June 2017, but recommended use of surplus funds for specific projects or operational requirements - Attachment 5 of item 5.2 of the Minutes of Audit Committee meeting	133,000
Adjustment of FAGS grants - recommended use of surplus funds to offset the reduction of FAGS funding as advised August 17 – Attachment 5 of item 5.2 of the Minutes of Audit Committee meeting	193,249
Sub-total specified carryover	2,317,125
Total Surplus remaining	1,209,339
*RECOMMENDED RESERVE TRANSFERS*
Footpath Reserve	331,600
Road Reserve	250,000
Drainage Reserve	250,000
Public Open Space Reserve	377,739

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.

In 2016/2017 the Shire’s Land and Building assets were revalued. The Shire also opted to bring forward the valuation of furniture and equipment assets which had previously been valued in conjunction with all other infrastructure asset classes. The revaluation resulted in a total decrement of $1.077M which was offset against the asset revaluation reserves for each asset category.

ADJUSTMENTS TO PRIOR YEARS ANNUAL REPORTS

There were no adjustments required to prior year reports.

CONSULTATION

Department of Local Government and Communities

STATUTORY ENVIRONMENT

Department of Local Government and Communities Better Practice Review Program

Nil.

Annual Financial Report & Audit Report 2016/2017

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 $1,535,588 (surplus excluding FAGS grants in advance and committed expenditure) represents a variance of 4.04% compared to budgeted operating revenue for 2016/2017 of $38,013,988 (excluding non-operating grants and contributions for assets and profit on sale of assets). This is 3.04% over the adopted threshold of 1% ($380,139) 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.

Should this not be adopted by Council, the adoption of the 2016/2017 Annual Report to be presented at the October Ordinary Meeting of Council and Council’s ability to schedule the Annual Electors Meeting (AEM) in December as planned could be impacted. 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 2016/2017 surplus, should the Council 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 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

Simple Majority

COMMITTEE RECOMMENDATION 1:

That Council on recommendation from the Audit Committee:

1. Receives the Better Practice Review Report from the Department of Local Government and Communities;

2. Notes the identified areas where the Shire of Broome operates at a ‘better practice’ level; and

3. Requests that the Chief Executive Officer review the actions plan provided and present an updated action plan to Council via the Audit Committee.

VOTING REQUIREMENTS

Absolute Majority

COMMITTEE RECOMMENDATION 2:

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 3 October 2017.

3. Adopts the Annual Financial Report for the year ended 30 June 2017.

4. Allocates the net operating surplus from the 2016/2017 financial year as per Attachment 3, 4 and 5 of item 5.2 of the Minutes of Audit Committee meeting and applies $193,249 of the surplus to offset the reduction of 2017/2018 FAGS allocations with the balance of $1,209,339 to be transferred to reserves as follows:

a) Footpath Reserve $331,600

b) Road Reserve $250,000

c) Drainage Reserve $250,000

d) Public Open Space Reserve $377,739

(Absolute Majority Required)

Attachments