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New Local Government Act Mandates Internal Audit

The Office of Local Government has released an Explanatory Paper on the proposed Phase 1 Amendments to the Local Government Act. Consultation on the proposed amendments is open until 15 March 2016. The precise timing of the amendments is unclear although the Paper anticipates that amending legislation could be introduced into and passed by the NSW Parliament in 2016.

What’s New?

The proposed amendments include a number of important changes for internal audit. These are:

  • to require the information reported in councils’ annual reports to be endorsed as factually accurate by an internal audit committee.
  • introduce a mandatory requirement for councils to have an internal audit function.
  • require all councils to comply with guidelines issued by the Chief Executive of the Office of Local Government with respect to the implementation of their internal audit functions.
  • require all councils to appoint an audit, risk and improvement committee with a majority of independent members and an independent chair
  • permit councils to have joint arrangements for internal audit and share audit committees.

Implications for Councils?

Whilst the precise wording of the amendments has yet to be drafted there would appear to be a number of potential implications for councils as follows.

For those councils that currently have an internal audit function and an audit committee the only significant change is likely to be the need for the committee to endorse the information contained in the council’s annual report as being “factually accurate”. There is no guidance at this stage as to how an audit committee should satisfy itself that this is the case. This could obviously be quite an onerous task for a committee given the volume of information typically contained in an annual report and that fact the committee consists of a majority of independent members.

For those councils without an internal audit function and/or an audit committee there will be some work in establishing these. Councils will need to consider things like:

  • direct employment of an internal audit function vs. outsourcing or co-sourcing
  • the potential for resource sharing with other councils
  • recruitment of suitable independent committee members
  • meeting arrangements
  • establishment of an internal audit plan

Next Steps

Whilst the detail on specific requirements won’t be known until the drafting of the proposed changes to the legislation is completed, it would be prudent for Councils without an internal audit function and/or audit committee to start considering options and preparing for the proposed changes.

Should your Council wish to discuss the impact of the proposed changes, please contact our local government internal audit specialists Mitchell Morley or Tony Harb on 02 92411344.