Agenda of Internal Audit Advisory Committee Meeting

CONFLICT OF INTERESTS

What is a “Conflict of Interests” - A conflict of interests can be of two types:

Pecuniary - an interest that a person has in a matter because of a reasonable likelihood or expectation of appreciable financial gain or loss to the person or another person with whom the person is associated.

Non-pecuniary – a private or personal interest that a Council official has that does not amount to a pecuniary interest as defined in the Local Government Act (eg. A friendship, membership of an association, society or trade union or involvement or interest in an activity and may include an interest of a financial nature).

Remoteness – a person does not have a pecuniary interest in a matter if the interest is so remote or insignificant that it could not reasonably be regarded as likely to influence any decision the person might make in relation to a matter or if the interest is of a kind specified in Section 448 of the Local Government Act.

Who has a Pecuniary Interest? - a person has a pecuniary interest in a matter if the pecuniary interest is the interest of the person, or another person with whom the person is associated (see below).

Relatives, Partners - a person is taken to have a pecuniary interest in a matter if:

§ The person’s spouse or de facto partner or a relative of the person has a pecuniary interest in the matter, or

§ The person, or a nominee, partners or employer of the person, is a member of a company or other body that has a pecuniary interest in the matter.

N.B. “Relative”, in relation to a person means any of the following:

(a) the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descends or adopted child of the person or of the person’s spouse;

(b) the spouse or de facto partners of the person or of a person referred to in paragraph (a)

No Interest in the Matter - however, a person is not taken to have a pecuniary interest in a matter:

§ If the person is unaware of the relevant pecuniary interest of the spouse, de facto partner, relative or company or other body, or

§ Just because the person is a member of, or is employed by, the Council.

§ Just because the person is a member of, or a delegate of the Council to, a company or other body that has a pecuniary interest in the matter provided that the person has no beneficial interest in any shares of the company or body.

Disclosure and participation in meetings

§ A Councillor or a member of a Council Committee who has a pecuniary interest in any matter with which the Council is concerned and who is present at a meeting of the Council or Committee at which the matter is being considered must disclose the nature of the interest to the meeting as soon as practicable.

§ The Councillor or member must not be present at, or in sight of, the meeting of the Council or Committee:

(a) at any time during which the matter is being considered or discussed by the Council or Committee, or

(b) at any time during which the Council or Committee is voting on any question in relation to the matter.

No Knowledge - a person does not breach this Clause if the person did not know and could not reasonably be expected to have known that the matter under consideration at the meeting was a matter in which he or she had a pecuniary interest.

Participation in Meetings Despite Pecuniary Interest (S 452 Act)

A Councillor is not prevented from taking part in the consideration or discussion of, or from voting on, any of the matters/questions detailed in Section 452 of the Local Government Act.

Non-pecuniary Interests - Must be disclosed in meetings.

There are a broad range of options available for managing conflicts & the option chosen will depend on an assessment of the circumstances of the matter, the nature of the interest and the significance of the issue being dealt with. Non-pecuniary conflicts of interests must be dealt with in at least one of the following ways:

§ It may be appropriate that no action be taken where the potential for conflict is minimal. However, Councillors should consider providing an explanation of why they consider a conflict does not exist.

§ Limit involvement if practical (eg. Participate in discussion but not in decision making or vice-versa). Care needs to be taken when exercising this option.

§ Remove the source of the conflict (eg. Relinquishing or divesting the personal interest that creates the conflict)

§ Have no involvement by absenting yourself from and not taking part in any debate or voting on the issue as if the provisions in S451 of the Local Government Act apply (particularly if you have a significant non-pecuniary interest)

RECORDING OF VOTING ON PLANNING MATTERS

Clause 375A of the Local Government Act 1993 – Recording of voting on planning matters

(1) In this section, planning decision means a decision made in the exercise of a function of a council under the Environmental Planning and Assessment Act 1979:

(a) including a decision relating to a development application, an environmental planning instrument, a development control plan or a development contribution plan under that Act, but

(b) not including the making of an order under Division 2A of Part 6 of that Act.

(2) The general manager is required to keep a register containing, for each planning decision made at a meeting of the council or a council committee, the names of the councillors who supported the decision and the names of any councillors who opposed (or are taken to have opposed) the decision.

(3) For the purpose of maintaining the register, a division is required to be called whenever a motion for a planning decision is put at a meeting of the council or a council committee.

(4) Each decision recorded in the register is to be described in the register or identified in a manner that enables the description to be obtained from another publicly available document, and is to include the information required by the regulations.

(5) This section extends to a meeting that is closed to the public.

BYRON SHIRE COUNCIL

Staff Reports - Corporate and Community Services 5.1

Staff Reports - Corporate and Community Services

Report No. 5.1 Draft 2014/2015 Financial Statements

Directorate: Corporate and Community Services

Report Author: James Brickley, Manager Finance

File No: I2015/1279

Theme: Corporate Management

Financial Services

Summary:

This Report has been prepared to provide the Internal Audit Advisory Committee with a report on the audit for the financial year ended 30 June 2015, and to recommend to Council the adoption of the Draft 2014/2015 Financial Statements, to complete the steps outlined in Sections 418 to 420 of the Local Government Act 1993 , for the finalisation of the 2014/2015 financial reporting cycle.

RECOMMENDATION:

That the Internal Audit Advisory Committee recommend to Council:

1. That Council approve the signing of the “Statement by Councillors and Management” in accordance with Section 413(2)(c) of the Local Government Act 1993 and Clause 215 of the Local Government (General) Regulation 2005 in relation to the 2014/2015 Draft Financial Statements.

2. That Council exhibit the Financial Statements and Auditor’s Report and call for public submissions on those documents with submissions closing on 27 November 2015 in accordance with Section 420 of the Local Government Act 1993.

3. That the Audited Financial Statements and Auditors Report be presented to the public at the Ordinary Meeting of Council scheduled for 19 November 2015 in accordance with Section 418(1) of the Local Government Act 1993.

Attachments:

1 Draft 2014/2015 General Purpose Financial Statements, E2015/66974 , page 13

2 Draft 2014/2015 Special Purpose Financial Reports, E2015/66976 , page 101

3 Draft 2014/2015 Special Schedules, E2015/67408 , page 119

4 Draft Audit Report 2014/2015 General Purpose Financial Statements, E2015/67648 , page 144

5 Draft Audit Report 2014/2015 Special Purpose Financial Statements, E2015/67649 , page 146

6 Draft Long Form Audit Report 2014/2015, E2015/67658 , page 148

7 Confidential - Audit Finalisation Report, E2015/67654

Report

The purpose of this report is to provide an opportunity for members of the Internal Audit Advisory Committee to discuss the information contained within the Draft 2014/2015 Financial Statements and to make recommendations to Council on the signing of the “Statement by Councillors and Management” and the exhibition of the financial statements. Council’s Auditors, Thomas Noble and Russell will be attending this meeting to address issues that have arisen during the course of the audit.

The Financial Statements and Auditor’s Reports are a statutory requirement and provide information on the financial performance of Council over the previous twelve-month period.

The Committee should place emphasis on the Auditor’s Report contained at Attachment 6 relating to the attached documents as it provides some analysis of Council’s financial operations overall and on a fund by fund basis (General, Water and Sewerage), and highlights the trending of major items within the Financial Statements.

The Draft 2014/2015 Financial Statements provided in the attachments are broken down into three sections being;

- General Purpose Financial Statements – Attachment 1

- Special Purpose Financial Statements – Attachment 2

- Special Schedules – Attachment 3

Brief explanations for each of these items are as follows.

General Purpose Financial Statements

These Statements provide an overview of the operating result, financial position, changes in equity and cash flow movement of Council as at 30 June 2015 on a consolidated basis with internal transactions between Council’s General, Water and Sewerage Funds eliminated. The notes included within these reports provide details of major items of income and expenditure with comparisons to the previous financial year. The notes also highlight the cash position of Council and indicate which funds are externally restricted (i.e. may be used for a specific purpose only), and those that may be used at Council’s discretion.

Special Purpose Financial Statements

These Statements are a result of the implementation of the National Competition Policy and relate to those aspects of Council’s operations that are business orientated and compete with other businesses with similar operations outside the Council. Mandatory disclosures in the Special Purpose Financial Reports are Water and Sewerage. Additional disclosure relates to Council business units that Council deems ‘commercial’. In this regard Council has traditionally reported its Caravan Park Operations being Suffolk Beachfront Holiday Park and First Sun Holiday Park on a combined basis. These financial reports must also classify business units in the following categories:

· Category 1 – operating turnover is greater than $2million

· Category 2 – operating turnover is less than $2million

All of Council’s business units are classed as Category 1 with all having operating turnover greater than $2million.

Another feature of the Special Purpose Financial Reports is to build in taxes and charges where not physically incurred into the financial results to measure the results in the sense of a level playing field with other organisations operating similar businesses whom are required to pay these additional taxes and charges. These taxes and charges include:

· Land tax – Council is normally exempt from this tax so notional land tax is applied.

· Income tax – Council is exempt from income tax and in regard to these reports, company tax. Any surplus generated has a notional company tax applied to it.

· Debt guarantee fees – Generally due to the low credit risk associated with Councils, Councils can often borrow loan funds at lower interest rates then the private sector. A debt guarantee fee inflates the borrowing costs by incorporating a notional cost between interest payable on loans at the interest rate borrowed by Council and one that would apply commercially.

In regard to the Special Purpose Financial Reports, these are prepared on a non consolidated basis or in other words grossed up to include any internal transactions with the General Fund.

Special Schedules

These schedules are prepared essentially for use by the Australian Bureau of Statistics and are primarily used to gather information for comparative purposes. Special Schedules 3 to 6 are also used by the NSW Office of Water in analysing the performance of the Water and Sewer Funds and are also non consolidated and grossed up including internal transactions. Special Schedule 7 provides an approximate value of what funds are needed for the maintenance and renewal of Council assets in comparison to what is currently allocated in the budget. For 2014/2015, Special Schedule 7 has continued to be amended in terms of disclosure with performance ratios. Special Schedule 8 regarding financial projections is no longer required and Special Schedule 9 has been included, which is a disclosure regarding Council’s compliance with General Rate revenue raising and rate pegging. Special Schedule 9 is also subject to external audit.

Auditors Reports on the Financial Statements

Council’s auditors, Thomas Noble and Russell, have completed their audit of the Draft 2014/2015 Financial Statements. All matters identified during the audit have been adjusted and included in the Draft 2014/2015 Financial Statements included at Attachments 1, 2 and 3. The Auditors Reports contained at Attachment 4, 5, 6 and 7 is to report on the following:

· A report on the general purpose financial report. This report provides an analysis of various items within the General Purpose Financial Reports.

· A report on the conduct of the audit. This report states that the audit was carried out in accordance with the Australian Auditing Standards in order to form an opinion as to presentation and content of the financial statements.

· Statutory independent audit reports for both the General Purpose and Special Purpose Financial Statements.

Specific Items relating to 2014/2015 Draft Financial Statements

The Draft 2014/2015 Financial Statement results have been impacted by the following items that require explanation to the Internal Audit Advisory Committee:

· Operating Result from Continuing Operations

The 2014/2015 financial year has seen a further very significant improvement in the operating financial results of Council. Overall Council recorded a $6.845million surplus compared to a $3.436million surplus in 2013/2014. This represents a change of $3.409million between financial years. This result incorporates the recognition of capital revenues such as capital grants and contributions.

A more important indicator is the operating result before capital grants and contributions. Whilst this result still presented Council with a deficit of $425,000 for 2014/2015, it was a $4.527million improvement on the 2013/2014 result of a deficit of $4.952million.

If reference is made to the Income Statement to the General Purpose Financial Reports included at Attachment 1, the following table indicates the major changes between 2014/2015 and 2013/2014 by line item:

Item	Change between 2014/2015 and 2013/2014 $’000	Change Outcome	Comment
Income
Rates & Annual Charges	+$1,606	Increase	Reflects imposition of rate peg increase for 2014/2015 of 2.3% and changes in annual charges from Council’s adopted 2014/2015 Revenue Policy
User Charges and Fees	+$1,165	Increase	Major changes include additional $200k revenue for holiday parks, $361k for planning and development fees, $930k increase in waste fees and $590k reduction in private works revenues. Further information is available in Note 3(b) in Attachment 1.
Interest and Investment Revenue	-$328	Decrease	Decline in revenues due to decline in interest rates reflective of economic conditions. Additionally 2013/2014 Council realised a fair value gain on investments of $443k whereas in 2014/2015 it was $48k.
Other Revenues	-$426	Decrease	Decline due to one off receipts in 2013/2014 from sale of Carbon Credits (Waste) $269k and insurance claim recovery $264k. Council did receive additional fine income of $59k.
Grants & Contributions – Operating	+$6,996	Increase	Increase in financial assistance grant $1,394k due to timing of payments, $710k recognition of Roads to Recovery grant as operating due to Code disclosure requirements, increased waste management grants $644k and $4,100k increase in Roads and Bridges contributions for restoration works of transport assets associated with recent natural disasters continuing.
Grants & Contributions – Capital	-$1,119	Decrease	Decline due to reduction in developer contributions received $614k, subdivider asset dedications $948k and an increase in capital grants of $505k.
Total Income Change	+$7,894	Increase

Expenditure
Employee Benefits and Oncosts	-$836	Decrease	Increased employee costs capitalised $619k to capital works and not charged to operations. Gross salaries and wages $457k but employee leave entitlements increased by $239k to recognise oncosts on long service leave related to superannuation but in real terms leave entitlements decreased.
Borrowing Costs	-$366	Decrease	Results from Council gradually repaying loans and not borrowing new loans plus recognition of recent loan refinancing
Materials & Contracts	+$7,918	Increase	Significant increase due to contracts related to restoration of transport assets following recent natural disasters continuing. Also increase in agency temporary staff of $300k but slight reduction in legal costs and 99k reduction in operating lease costs for IT.
Depreciation	-$1,833	Decrease	Major change is due to changes from revaluation of Transport and Stormwater Drainage Assets discussed on subsequent pages of this report.
Other Expenses	+$29	Increase	Minor change but there were variation in line items as disclosed at Note 4(e) in Attachment 1.
Net Losses from Disposal of Assets	-$426	Decrease	Reflection of the written down value of assets disposed at the end of financial year and is contingent upon the extent of assets disposed and their written down value at the time of disposal which can vary.
Total Expenditure Change	+$4,485	Increase

Change in Result	+$3,409	Increase

Following on from the operating results, there are new performance ratios disclosed at note 13 to the General Purpose Financial Statements and in Special Schedule 7. These ratios have been derived following the financial assessments undertaken by NSW Treasury Corporation on all NSW Councils in 2012 and are now incorporated into the latest update to the Code of Accounting Practice and Financial Reporting that determines the content of Council’s Financial Statements. These ratios also have trend graphs and all look to be presenting either a stable or improving result for Council in Note 13. Council though in relation to the ratios for Special Schedule 7 in terms of Asset Management, whilst showing some improvement generally, still has a ways to go to meet the required benchmarks.

It is also important to note that the ratios and benchmarks outlined in Note 13 to the General Purpose Financial Statements and Special Schedule 7 are on an annual basis. Whilst some of these ratios were also benchmarks in Council’s ‘Fit for the Future’ response, these were reported as a three year average as required. Therefore direct comparison cannot be made.

· Asset Revaluations and Depreciation

During 2014/2015, there was a revaluation conducted for Council’s Transport Assets and Stormwater Drainage Assets. The independent revaluation was conducted by Jeff Roorda and Associates (JRA). The revaluation was conducted as at 1 July 2014 and saw a write down in the value of the Assets revalued by $190.506million. In terms of assets, Transport and Stormwater Drainage assets are the biggest category in terms of asset quantity and value on Council books. Council to assist the revaluation also conducted a condition assessment of the road network in 2014. In summary the valuation changes are as follows extracted from the JRA valuation report:

Category ($'000)	Note 9a 30 June 2014		2015 Revaluation Comparison		Variation from Source Data
	Note 9a 30 June 2014		2015 Revaluation Comparison		CRC ($)	CRC (%)	Depreciation ($)	Depreciation (%)
	CRC	Depreciation	CRC	Depreciation	CRC ($)	CRC (%)	Depreciation ($)	Depreciation (%)
Roads	$317,122	$5,889	$286,058	$4,943	-$31,064	-10%	-$946	-16%
Bridges	$36,697	$419	$23,664	$293	-$13,033	-36%	-$126	-30%
Footpaths	$57,709	$902	$7,512	$126	-$50,197	-87%	-$776	-86%
Bulk Earthworks	$98,314	$0.00	$29,046	$0.00	-$69,268	-70%	$0.00	0%
Stormwater Drainage	$87,924	$885	$60,980	$574	-$26,944	-31%	-$311	-35%
TOTAL	$597,766	$8,095	$407,260	$5,936	-$190,506	-32%	-$2,159	-27%

There has been a major review of the unit rates employed by Council to construct assets in that the view expressed in the revaluation was the unit rates employed by Council were too high. Unit rates of construction applied in the revaluation were a combination from the following sources:

· Council’s construction costs.

· JRA knowledge of construction costs given their experience across Australia in this type of work,

· Rawlinsons Construction Cost Guide.

Some of the changes in unit rates applied in the valuation compared to those previously utilised by Council are demonstrated in the table below:

Asset Item	Council historical unit rate	JRA Valuation Unit Rate
Footpaths - Timber	$20.00 to $50 per sq metre	$15.00 per sq metre
Footpaths - Asphalt	$47.00 to $95.00 per sq metre	$34.00 per sq metre
Footpaths - Concrete	$88.29 to $96.43 per sq metre	$54.00 per sq metre
Footpaths - Pavers	$176.65 per sq metre	$82.00 per sq metre
Roads formation (bulk earthworks)	$26.00 to $30.00 in 2010 per sq metre plus indexation	$5.00 per sq metre
Kerb and Gutter	$301.50 per metre	$100.00 per metre
Carparks - formation	$55.34 per sq metre	$5.00 per sq metre
Carparks – sub base	$55.34 per sq metre	$20.00 per sq metre
Carparks - surface AC	$73.79 per sq metre	$24.00 per sq metre

In addition to the changes in the unit rates outlined above, there was also a reassessment of useful lives of transport and stormwater drainage assets as outlined in the table below:

Asset Item	Previous Useful Life by Council	Useful Life JRA Valuation
Sealed Road Surface	15 years	20 to 60 years
Sealed Road Base	50 years	40 to 60 years
Sealed Road Sub Base	50 years	200 years
Unsealed Roads Base	15 years	15 to 20 years
Bridge – Concrete	150 years	60 to 100 years
Bridge – Other	80 years	60 to 100 years
Footpaths – Concrete	50 to 70 years	83 years
Footpaths – Pavers	50 to 70 years	83 years
Footpaths - Asphalt	50 to 70 years	26 years
Carparks – Surface	15 years	20 years
Carparks – Base	50 years	200 years
Stormwater – Pits	30 to 100 years	Short Life 100 years Long Life 200 years
Stormwater - Pipes	50 to 60 years	100 years

The consequence of the changes to unit rates of construction and useful lives of the assets has resulted in a reduction of annual depreciation expense of $2.159million for the 2014/2015 financial year in relation to Transport and Stormwater Drainage Assets. The reduction in depreciation expense has been a significant contributor to the improved operating performance of Council. Depreciation expense overall saw a reduction of $1.833million in total as there were changes to depreciation for other assets classes.

· Cash and Investments

As at 30 June 2015, Council has $1.143million in unrestricted cash and investments, an improvement of $107,000 over the previous year. This is an ongoing pleasing result and Council has been able to maintain another one of its short term financial goals of reaching unrestricted cash balance of $1million. All other cash and investments totalling $71.832million are restricted for specific purposes. Overall the cash and investment position of Council increased by $9.537million during the year. Council’s investment portfolio achieved a fair value gain of $48,000 during the year which is a continuation of a recovery in the value of Council’s longer term investments post the Global Financial Crisis and is reflective that as the investments get closer to maturity their value will increase. Council’s last investment not yet to recover to its full capital value matures in October 2015. At this time Council will have finally have all investments compliant with the Ministerial Investment Order and no longer needing to access the ‘grandfathering’ provisions of that Order.

· Loan Borrowings

During 2014/2015 Council did not borrow any new loans but did payout three loans in the Sewerage Fund that were borrowed in the 1970s. In addition due to the financial strength of the Water Fund, the sole existing loan in that Fund was paid out in full during the year. The loan restructuring provided an opportunity consistent with the principals of the Financial Sustainability Project Plan (FSPP) in regards to Debt.

Council’s outstanding loans as at 30 June 2015 are $66.286million. Total loan expenditure for 2014/2015 included interest of $4.976million and principal payments of $3.262million. Total expenditure of Council in 2014/2015 related to loan repayments was $8.238million or 13.3% of Councils revenue excluding all grants and contributions.

Outstanding loans by Fund totalling $66.286million are as follows:

· General Fund $16.154million

· Water Fund $Nil

· Sewerage Fund $50.132million

Liquidity

Council’s balance sheet indicates net current assets of $66.07million. It is on this basis in the opinion of the Responsible Accounting Officer that the short term financial position of Council remains in a satisfactory position and that Council can be confident it can meet its payment obligations as and when they fall due.

Council’s Unrestricted Current Ratio has improved to 2.91 demonstrating Council has $2.91 in unrestricted current assets compared to every $1.00 of unrestricted current liabilities.

On a longer term basis Council will need to consider its financial position carefully but in isolation the financial results for 2014/2015 continue to be an ongoing significant improvement for Council and demonstrate the ongoing gains through the implementation of the Financial Sustainability Project Plan and the efforts of Council.

Audit Finalisation Report for the Internal Audit Committee

Council’s Auditors, Thomas Noble and Russell have completed an Audit Finalisation Report for the Internal Audit Committee that discusses the audit of the Financial Statements for the year ended 30 June 2015. This report is provided on a confidential basis at Attachment 7 as the ‘Report to the Internal Audit Advisory Committee, which is a committee of Council, is for the sole use of the Council and is not to be used by any other person for any other purpose and may not be distributed, duplicated, quoted, referred to, in whole or in part, without our prior written consent.’

Thomas Noble and Russell will speak to this report at this Internal Audit Advisory Committee Meeting.

Financial Implications

There are no direct financial implications associated with this report as the report does not involve any future expenditure of Council funds but it is a report advising the financial outcomes of Council during the 2014/2015 financial year which are identified in this report, Attachments 1 to 3 and the Auditors reports in Attachments 4 to 7.

Statutory and Policy Compliance Implications

Section 413(2)(c) of the Local Government Act 1993 and Clause 215 of the Local Government (General) Regulation 2005 requires Council to specifically form an opinion on the financial statements. Specifically Council needs to sign off an opinion on the Financial Statements regarding their preparation and content as follows:

In this regard the Financial Statements have been prepared in accordance with:

· The Local Government Act 1993 (as amended) and the Regulations made thereunder.

· The Australian Accounting Standards and professional pronouncements.

· The Local Government Code of Accounting Practice and Financial Reporting.

And the content to the best of knowledge and belief:

· Present fairly the Council’s operating result and financial position for the year.

· Accord with Council’s accounting and other records.

· Management is not aware of any matter that would render the Reports false or misleading in any way.

Section 416(1) of the Local Government Act 1993, requires a Council’s annual Financial Statements to be prepared and audited within four (4) months of the end of that financial year ie on or before 31 October 2015.

Section 417(4) of the Local Government Act 1993 requires, as soon as practicable after completing the audit, the Auditor must send a copy of the Auditor’s Reports to the Director-General and to the Council.

Section 417(5) of the Local Government Act 1993 requires Council, as soon as practicable after receiving the Auditor’s Reports, to send a copy of the Auditor’s Reports on the Council’s Financial Statements, together with a copy of the Council’s audited Financial Statements, to the Director-General before 7 November 2015.

Section 418(1) of the Local Government Act 1993 requires Council to fix a date for the Meeting at which it proposes to present its audited Financial Statements, together with the Auditor’s Reports, to the public, and must give public notice of the date so fixed. This requirement must be completed within five weeks after Council has received the Auditors Reports ie prior to 5 December 2015.

Section 420 of the Local Government Act 1993 requires Council to provide the opportunity for the public to submit submissions on the Financial Statements. Submissions are to be submitted within seven days of the Financial Statements being presented to the public. In the case of the 2014/2015 Financial Statements, closing date for submissions will be 27 November 2015.

Venue	Meeting Room 1, Station Street, Mullumbimby
Date	Thursday, 22 October 2015
Time	11.00am