Local Government Audit Service. Activity Report

Transcription

1 Local Government Audit Service Activity Report April 2010

2 The mission of the is to carry out the annual financial audits of local authorities, using a structured audit methodology and in accordance with the Code of Audit Practice and associated guidelines based on professional auditing standards. To promote the achievement of value for money in local authorities by undertaking and publishing national value for money audit reports and by following up on the action taken by authorities on the implementation of recommendations contained therein. 2

3 Table of Contents PAGE Foreword 4 BAckGround 5 StAFF resources 6 Audit remit 7 AccountABiLity of LocAL AuthoritieS 8 LocAL Government Audit ProcedureS 8 outputs From Audit 9 Audit work ProGrAmme 9 Audit committees 10 matters referred to in Audit reports 10 value For money Audit 13 external relationships 14 3

4 Foreword this report sets out the main activities of the (LGAS) in its role of ensuring accountability in local authorities. the LGAS has continued to develop its policies and procedures to meet the requirements of the code of Audit Practice and to take account of the principles, which underpin public sector audit. these principles are aptly described by the Public Audit Forum in the uk, as the independence of public sector auditors from the organisations being audited. the wide scope of public audit covering the audit of accounts, the legality of the underlying transactions, matters of probity and value for money issues. the ability of public auditors to make the results of these audits available to the public and to democratically elected representatives. in view of the current challenging economic climate it is a must for city and county councils to maintain and support a strong internal audit function. Audit committees have been reestablished in the councils following the 2009 local elections. the important work carried out by these committees needs to be supported by an active internal audit function. Some councils have an excellent tradition of preparing their draft annual financial statements on a timely basis. it is essential that such practice becomes the norm. the LGAS is committed to providing an independent and professional public sector audit service to local government. it aims to promote high standards of governance and accountability. the service is currently delivering on a strategy to improve the timeliness of its financial / regularity audit reporting. Significant increases in the levels of activity in local authorities over the last three years (see table 1 page 7), as well as the expansion of the value for money function, has placed increased demands on the service. in this regard 2009 was a very challenging year for the LGAS. the successful completion of the demanding work programme would not have been possible without the dedication and effort of all staff for which i am very grateful. their continued commitment, motivation and professionalism will be much needed in the challenging year ahead. noel o connell director of Audit April

5 Background the LGAS in the republic of ireland is, for administrative purposes, a division of the department of the environment, heritage and Local Government (the department). it audits the accounts of all local bodies such as cities, counties, towns and miscellaneous bodies including some harbour authorities. the total number of bodies under its remit is 184. the LGAS provides independent scrutiny of the financial stewardship of local authorities. its role is to: carry out audits of local authorities and other bodies in accordance with its code of Practice, thereby fostering the highest standards of financial stewardship, governance and public accountability; Promote the achievement of value for money in local authorities by undertaking value for money (vfm) audits and publishing reports thereon. the director of Audit is the organisational head of the service. this post is a statutory position and the main functions, as prescribed in section 116 of the Local Government Act, 2001, are to: a) organise, direct and allocate resources within the LGAS; b) Assign audits of particular local authorities or other bodies to particular Local Government Auditors; c) Provide such advice and assistance as the minister may, from time to time, require for the purposes of maintaining a code of Audit Practice; d) direct the Local Government value for money unit established by section 14 of the Local Government (Financial Provisions) Act 1997, and to ensure that the work of the unit is incorporated into local government audit practice. each Local Government Auditor is assigned an audit district under warrant of authority from the director of Audit. there are at present twenty-one local government audit districts. Local Government Auditors are independent of the department when discharging their professional functions. this independence is protected in legislation in accordance with section 116(2) of the Local Government Act, Audit districts comprise a number of audits grouped, as far as possible, in convenient geographical areas, and these districts are further grouped into four regions, western, Southern and two eastern. Principal Auditors assist in the regional organisation and supervision of audits. in addition they have direct responsibility for the major audits in their region. one Principal Auditor has responsibility for the management of the value for money unit, to which additional resources have recently been allocated. 5

6 Staff Resources the following is the staff complement of the. director of Audit 1 Principal Local Government Auditors 7 Local Government Auditors 20 Assistant Auditors 14 clerical / Secretarial 2 total 44 All audit staff are professionally qualified accountants and have, for many years been recruited externally, having worked in industry, public audit firms, public sector bodies, and this mix of skills enhances the organisation. in the last year two members of staff, Joe mccarthy and Frank christian retired after many years of dedicated service. consequently, one Local Government Auditor, James moran, was promoted to Principal Auditor and has taken over the southern region. due to the embargo on public sector recruitment two local government auditor posts and one post for an assistant auditor remain unfilled at present. All audit staff completed their Performance management and development System (PmdS) reviews during the year and many, with the assistance of the training and development unit of the department, attended relevant courses. these courses, together with the LGAS Annual conference, facilitated staff in meeting the continuing professional development (cpd) requirements, imposed by their respective accountancy bodies. the LGAS continued to be a recognised employer for cpd purposes for members of the Association of chartered certified Accountants (AccA). the topics covered in the LGAS Annual conference, which was held in April 2009, included the following: LGAS risk register; Business Plan; data management; Agresso FmS Audit; teammate development; vfm and LGAS Audits; Audit reporting in the LGAS; new Payroll System for Local Authorities; developing the role of Audit committees; capital Projects and dehlg. 6

7 Audit Remit the following bodies are subject to local government audit: Status of Body Number city councils 5 county councils 29 Borough councils 5 town councils 75 regional Authorities 8 regional Assemblies 2 motor taxation offices 29 miscellaneous 31 Total 184 Local authority revenue and capital expenditure, over the last three years are shown in the table below. Table 1 Local Authority Expenditure 14,000 12,000 10,000 m 8,000 6,000 4,000 2, revenue 4,218 4,578 5,086 capital 5,437 6,773 6,547 total 9,655 11,351 11,633 All amounts shown are m 7

8 Accountability of Local Authorities Local authorities are statutorily obliged to keep proper books of account and to prepare annual financial statements of their activities to 31 december each year. these statements have to be prepared in accordance with the department s accounting requirements as prescribed in: Section 107 of the Local Government Act, 2001 Accounting code of Practice and guidelines Local Government (Financial Procedures and Audit) regulations Local authorities, other than the former town commissioners, have prepared their annual financial statements on the accruals basis for a number of years. the new financial accounting systems implemented in these bodies have enabled local authorities to produce full income and expenditure accounts and balance sheets. this has been achieved on an incremental basis over time and represents a significant change in local government accounting. A new format of the annual financial statement was introduced for the 2008 accounts. this service-based format was developed as part of an effort to reflect more accurately the actual cost of services and, in particular, to facilitate a better allocation of indirect costs and overheads. the accounting year-end for local authorities is 31 december and the annual financial statements are required to be prepared by the following April and published by July in accordance with the Accounting code of Practice. every effort must be made by all audited bodies to meet these statutory deadlines. Local Government Audit Procedures the audit of local government was updated and consolidated in sections 114 to 126 of the Local Government Act, Audits are carried out in accordance with a prescribed code of Audit Practice, which covers: Purpose of audit Powers and duties of auditors the audit approach outputs from audit Public accountability. Since 2006, the has undertaken a financial audit improvement programme. this involved the development of audit guidelines on many aspects of the audit process and the implementation of an electronic working paper system (teammate). the aim of this process was to develop and improve a standard audit approach throughout the LGAS. Some of the features of the teammate software as implemented by the LGAS are: 8

9 risk Assessment module Standard format of audit files Standard audit tests improved tracking of matters arising at audit Guidance notes for audit staff Audit file and data encryption centralised retention of audit files. this system has been fully implemented in the LGAS, with auditors now using the new software on all audits. it is intended to further develop and improve the standard audit approach, including the use of teammate, on an ongoing basis. All electronic audit working papers on the teammate system are automatically encrypted. in order to reduce the risk of the loss of sensitive client data, the LGAS has, in conjunction with the ict unit of the department, carried out the task of encrypting all laptops and removable media devices. Outputs from Audit Auditors are required to give an audit opinion on the annual financial statements of local authorities and other audited bodies. this opinion is the culmination of the auditor s work on reviewing the audited body s transactions as reported in the annual financial statement. the auditor expresses an opinion as to whether the annual financial statement presents fairly, in accordance with the Accounting code of Practice and regulations the financial position of the body at the year-end (31 december) and of its income and expenditure for the year then ended. in addition to the audit opinion, it is custom and practice to issue statutory audit reports on the major audits, covering any matter or matters which the auditor feels should be reported. the manager of a local authority is required to respond to this report and his/her comments may be included as part of the final report. this procedure has enhanced public scrutiny of local government as the actions of managers, to address the issues raised at audit, now form part of the published audit reports. A new form of standard audit reporting template was introduced for the service in 2009 and appears to be well received by both auditors and the local bodies. in accordance with professional audit practice, an auditor may issue a management letter drawing attention to any weaknesses in financial procedures and / or controls identified during audit, and make appropriate recommendations. A management letter may incorporate audit memoranda already issued to functional officers and line managers during the audit. A total of 89 management letters were issued in relation to the 2008 audits. management letters are always issued as part of the external audit process for the 34 major authorities. Audit Work Programme the financial statements of local authorities are prepared to 31 december each year. due to the legal formalities involved in the commencement of these audits and the time lag between the end of the financial year and the finalisation of the draft accounts, the work cycle of the audit 9

10 service runs from April to the following 31 march e.g. audits for the year ended 31 december 2008 are to be completed by 31 march the service has completed its audit work on 180 of its 184 audits. the accounts for two harbour authorities were not prepared for audit. the audits for one town and one borough council for 2008 were not carried out due to demands on staff resources. these audits will be carried out in the audits of the 2008 annual financial statements for all the major local authorities were completed by the end of February we are endeavouring to bring forward this deadline to end of January 2011 for the 2009 audits. Audit Committees the work carried out by audit committees is adding real value to the oversight of the corporate governance agenda in local government. these committees normally comprise of five members, three external (including the chairperson) and two serving or retired councillors. they carry out their functions under a formal charter. it is now standard practice for the committees to meet with the local government auditors to discuss action taken by management arising from issues contained in the statutory audit reports. one of the functions of the committees is to promote value for money and efficiency within their authorities, this role needs to be actively driven with management Matters referred to in Audit Reports the following is a summary of specific issues referred to in the city and county audit reports for 2008, including the number of authorities where similar issues have been reported. Audit Issue Authorities commercial water charges 26 development contributions 19 capital Account Balances 14 revenue Account deficits over 3m 7 internal Audit 11 Fixed Assets 11 Affordable housing 10 Loans Payable 10 construction contracts 9 debtors 6 LA companies /Joint ventures 4 10

11 Commercial Water Charges Poor collection of commercial water charges is the most common issue arising in audit reports. this is attributed to a variety of reasons, including problems with the introduction of meters, the timing of the issue of invoices, disputed charges, changes in billing procedures and inadequate follow up of arrears. the percentage of charges collected in 2008 varied from a low of 23% to a high of 93% for the 34 major authorities. Local authority management have undertaken to address these issues. these matters will be reviewed as part of standard audit procedures. Development Contributions Problems in the accounting for development contributions have been referred to for a number of years, particularly since these debtors have been included in the balance sheet. most local authorities have implemented the Local Government computer Services Board Pdc system or an alternative system in in some local authorities the transfer of historical data to the new system is still outstanding and will require a significant effort. the collection of development contribution debtors must be prioritised in all authorities. due to the downturn in economic activity, progress on same will be a challenge for authorities, however a proactive approach to the collection of these debtors will be necessary. Capital Account Balances capital balances generally reflect the funding position on current, future and past projects. these balances are subject to timing differences such as delays in grant payments. however the increase in the number of unfunded balances is a cause for concern in some authorities. this may mean that decisions as to the source of funding for some project balances will have to be made. the depletion of existing funds / reserves is also reflected in these balances. Revenue Account Deficits there were seven county councils which had accumulated deficit balances on their revenue accounts in excess of 3m at 31 december 2008; mayo county council 3.51m, Sligo county council 4.28m, kildare county council 5.65m, wexford county council 6.79m, waterford county council 6.91m, meath county council 9.61m and donegal county council 12.99m. the elimination of the deficits must be a priority for these councils. Internal Audit Article 16 of the Local Government (Financial Provisions and Audit) regulations, 2002 state that a local authority or joint body shall maintain an adequate and effective system of internal audit of its accounting records and control systems. Local Government Auditors may place reliance on the work done by internal audit in carrying out their own audits and this reliance is referred to in a number of reports. there were three local authorities who had no internal audit function and others where the function is under-resourced. with the establishment of audit committees in local authorities, it is now more important than ever that a proper internal audit function is in place. 11

12 Fixed Assets the inclusion of fixed assets in the annual financial statements is a relatively new development and the value of these assets is substantial. issues raised in audit reports include the following: incomplete property / fixed assets register details Problems with the transfer of completed projects from work-in-progress to assets inadequate insurance cover for assets. the maintenance of proper fixed asset records is vital in order to safeguard the assets of a local authority. Affordable Housing Local authorities purchase or construct houses, mainly under Part v of the Planning & development Act 2002, to be sold as affordable houses to qualifying purchasers. in the current economic climate the sale of these houses has slowed considerably resulting in an increase in the stock of unsold houses held. these are financed, in the main, by means of bridging finance that will be repaid from sale proceeds. the future use and funding of these houses has become an issue in some authorities and various alternatives are being explored such as leasing of properties under the rental accommodation scheme, the social housing leasing scheme and ongoing sales campaigns. Loans Payable the increase in loans payable by local authorities, and the consequential cost of servicing this debt in the future, is referred to in a number of audit reports. other related matters include: redemption of bridging finance dependent on affordable housing sales rolled up interest loans for land purchases mortgage loan funding deficit Loan drawn to reduce revenue deficit. Construction Contracts Audit reports contained references to specific projects where contractors have made claims against local authorities and where disputes have been referred to arbitration or the courts. the agreement of final accounts on contracts is an issue that needs to be addressed by local authorities. the vfm unit of the LGAS has also undertaken spot checks on behalf of the department of approximately 60 capital contracts to ensure compliance with the guidelines issued by the department of Finance. the finalisation of a report on this work is currently in progress. 12

13 Debtors comments on the various debtors systems in operation in local authorities included the following: inadequate monitoring and follow up of arrears Poor collection performance disagreement with the level of bad debt provision. Local Authority Companies and Joint Ventures Local authorities sometimes set up, or become involved in limited companies, usually established for a specific purpose. details of these are included in appendices to the annual financial statements. Specific issues referred to in audit reports include: operating deficits on theatre and leisure facilities no formal agreement for swimming pool operation Poor financial position of joint venture facility Agreement to close down technology park joint venture. All the above matters will continue to be reviewed by the LGAS, particularly where there has been a pattern of re-occurrence within an authority. Value for Money Audit (VFM) the value for money audit unit of the LGAS consists of a central research team, staffed by a Principal Local Government Auditor and three Local Government Auditors, together with further audit days provided by Assistant Auditors at district level. A vfm audit consultative committee representing the main stakeholders, and chaired by the director of Audit, has been established. it has an advisory role in the selection of vfm projects and in reviewing the quality of draft reports before publication. Also, an advisory group is established for each vfm study undertaken, comprising representatives from local authorities, the department and/or individuals with expertise in a particular field. the unit has produced 25 vfm reports to date. A study is currently in progress on housing maintenance / management. A feasibility study is also being prepared on Procurement Practices. the work of the vfm unit has focused on undertaking national studies on single-issue topics and publishing reports thereon. during 2009 the unit broadened its sphere of activity by carrying out progress reports on the implementation, by local authorities, of the recommendations contained in national studies issued by the unit on internal audit and financial management reporting, 13

14 enquiring into councils arrangements for securing economy, efficiency and effectiveness in the use of resources through the use of questionnaires and structured interviews, carrying out spot-checks, on behalf of the department, of capital projects funded by the department and undertaken by local authorities, to ensure compliance with guidelines issued by the department of Finance. it is the responsibility of local authority management to ensure that value for money is achieved by establishing and maintaining sound arrangements, including procedures for planning, appraisal, authorisation and control of resources. External Relationships the LGAS has, over many years, developed relationships with a number of external bodies. these included the following: office of the comptroller and Auditor General (c&ag): copies of all LGAS reports are made available to the office of the c&ag as part of their audit of the dehlg. references have, in the past, been made at the Public Accounts committee meetings to matters arising in these reports. northern ireland Audit office (niao): meetings have been held with a number of representatives of the niao in relation to matters of common interest such as electronic working papers and vfm matters. representatives from the niao attend the LGAS annual conference. Audit Scotland: Staff from the LGAS have met their counterparts in Audit Scotland on a number of occasions over the years and in recent times discussed their audit approach and vfm matters. representatives of Audit Scotland have also attended the LGAS annual conference. the european organisation of regional Audit institutions (eurorai): the LGAS has been represented at conferences organised by this european institution for many years. this provides useful contact with regional audit bodies and staff from other european countries. working Groups and committees: the LGAS continues to be represented on a number of working groups and committees in areas of interest to the service. these include the following: costing of Services Group General Accounts working Group Planning and development contributions Project Board Finance and Business committee. engagement with these groups and audit organisations provide a vital means of ensuring that the LGAS is up to date with best public audit practice in other international jurisdictions. 14