Part 1: Our recent work on governance in local authorities

Local government: Results of the 2012/13 audits.

Several of our recent reports have considered the challenges of the governance role, particularly for those who are elected to govern local authorities. We drew on this work when we contributed to the training of new members of local authorities elected in October 2013. Our discussions with the sector, in that training and elsewhere, have focused on the tools available to help governance bodies manage their risks.

This Part sets out the main points from those discussions. We cover:

What is the role of an elected member?

Legislation does not spell out exactly what the governance role requires – for local authorities or any public entity. The responsibility is general and somewhat vague. It cannot be captured in a definitive list of tasks or functions.

The Local Government Act 2002 (the Act) requires each local authority, after an election, to work out how it is going to govern the organisation. Section 40 of the Act requires local authorities to prepare governance statements that set out, among other matters:

  • their view of the responsibilities of the local authority;
  • the electoral system and representation arrangements and how to change them;
  • elected members' roles and expected conduct;
  • governance structures and processes, including membership of the various committees that make up the governance structures and delegations of decision-making authority to those committees and to staff;
  • the meeting processes that will be followed; and
  • the management structure and the relationship between management and elected members.

In essence, elected members are responsible for what the local authority does and how it does it. This does not mean that all elected members must be actively involved in every part of the organisation's business. It is common to allocate large parts to management and staff, and to allocate different aspects of the governance responsibilities to specific parts of governance structures, such as local authority committees.

Generally, the roles are for:

  • the governing body to set direction and policy, make important decisions, report to the public, and oversee the functioning and health of the organisation including its long-term capability and sustainability, and its compliance with the law; and
  • management to focus on putting policies and decisions into effect, carrying out the organisation's functions, and providing information and advice to the governing body.

Elected members ensure that management is performing satisfactorily. The elected members are responsible for acting if problems emerge. Being able to identify risks early and manage them well is a vital skill for effective governance, helping to avoid pitfalls and keep an organisation on track.

In the end, elected members are responsible for "getting it right". To meet that responsibility, they need to receive high-quality information and advice from local authority officers and external professional advisors. Elected members need to know when to ask questions of their advisors, what questions to ask, and when to insist on expert advice to ensure that their questions are answered satisfactorily.

We encourage elected members to use common sense in their work. Common sense is a legitimate governance tool and a good way of testing technical and complex advice.

In November 2013, we noted in our report, Inquiry into the Mangawhai community wastewater scheme (our Kaipara District Council report) that the governance role is about maintaining the broad view. It involves:

  • setting direction and policy;
  • making significant decisions;
  • testing and challenging advice to ensure that it is sound;
  • monitoring the work of management to ensure that what is being done will achieve the local authority's objectives;
  • keeping an eye on risks; and
  • safeguarding the overall quality of the relationship between the local authority and its community.

When members of a governing body become too involved in operational matters, the risk is that nobody holds the broad view for the organisation and checks that the overall direction remains appropriate. Conversely, if elected members take too little interest in what the organisation is actually doing on the ground, they can become distant and disempowered. The art of effective governance is being able to find the right balance between these two extremes and understanding that the balance will change depending on the circumstances.

Fortunately, elected members do not carry out their responsibilities in isolation. Many sources of support are available. An elected member who understands when and how to use each source of support is more likely to be effective.

What sources of support are available?

Risks to local authorities come in several forms, including legal risk, financial risk, fraud risk, procurement risk, operational risk, and reputation risk. Newly elected members need to familiarise themselves with the main types of risk facing their organisation, how those risks are managed, and how they get information and assurance about them.

Local authority management

The chief executive is the link between governance and management. This means that it is vital that elected members have an effective relationship of trust with the chief executive. The chief executive is the conduit for access to the support of a team of senior managers and the organisation they lead.

The chief executive and staff are the main source of support for an elected member. That support must be accessed through appropriate channels, in keeping with the protocols agreed and recorded in the governance statement and elsewhere. Elected members need to respect that staff are impartial professionals, serving whomever the community elects to govern the organisation.

Legal advice

Managing legal risk is vital for public entities that exercise public power and spend public money. Legislative obligations affect all aspects of a local authority's work – how it operates, consults, runs meetings, makes decisions, and carries out what it actually does. Internal rules, such as organisational policies and delegations of authority, can also affect the lawfulness of individual decisions and actions.

Local authorities need to be meticulous about complying with the law and showing that they are acting within the law. The governors of the local authority should set that tone. In our Kaipara District Council report, we noted numerous inadequacies in the attention that the Council paid to legal issues when its Mangawhai wastewater project began, problems with the way it sought legal advice, and damage to its reputation within the community as a result.

If elected members are in doubt about their legal obligations, they should ask for professional legal advice. Some local authorities have internal capacity to provide legal advice. Many others rely on external legal advisers. The cost of obtaining such advice needs to be set against the importance of being seen to be careful to act within the law.

Audit committees

The governing body has to have an overview of all these risks. It also has to have systems or ways of getting advice to assure itself that the risks are appropriately managed. Many local authorities establish a dedicated audit (or audit and risk) committee. Such committees – usually a group of elected members and expert external appointees – are set up to give advice to the highest level of governance on matters of risk. Our 2008 guide, Audit committees in the public sector, commented that:

Audit committees have a valuable contribution to make in improving the governance, and so the performance and accountability, of public entities. They can play an important role in examining an organisation's policies, processes, systems, and controls. An effective audit committee shows that an organisation is committed to a culture of openness and continuous improvement.
An audit committee does not displace or change proper accountability arrangements. Accountability for good governance rests with the public entity's governing body …
Effective audit committees can provide objective advice and insights into the public entity's strategic and organisational risk management framework. In doing so, they can identify potential improvements to governance, risk management, and control practices.

There are four main assurance benefits from operating an effective audit committee – increased scrutiny, efficient use of resources, increased focus on internal assurance, and increased focus on accountability. The two main advisory benefits from operating an effective audit committee are a fresh perspective and a range of experience and expertise.

We noted in our Kaipara District Council report that audit committees are a particularly useful way for a governing body to manage any gaps in the skills and knowledge of its members. This is because of the ability to appoint independent members with particular expertise and experience.

We encourage those local authorities that have yet to set up an audit committee to consider doing so.

An effective audit committee plays an important role in improving governance, particularly because it can supplement the skills of the governing body with external appointees. However, an audit committee is only one part of protecting the local authority from risks. In the end, the governing body remains accountable for how well risks are managed, using the full range of tools available to it.

Internal audit

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes. The internal audit activity helps provide assurance to managers and governors that systems, processes, and controls are working effectively and in the way they were designed to.

An audit committee often oversees the programme of internal audit work.

External audit

Local authorities are required to have specific information in their annual reports and long-term plans audited. The purpose of the audit is to increase the confidence that readers can have in the information presented.

Local authorities need to understand the role of an auditor and their own responsibilities. The local authority is responsible for complying with legislative and accountability requirements. It must maintain financial and other records so that it can accurately meet its reporting obligations. Practical responsibility for maintaining good systems and producing the information rests with management. The local authority's governing body provides oversight and guidance, but it must also take formal responsibility for the information that is produced and reported.

The auditor's role is to provide an independent opinion on whether the information reported by the local authority can be relied on. The auditor does not provide an opinion (in a legal sense) on the local authority's legal compliance, other than the general assurance provided by the audit.

Local authorities often have a different impression of what an audit involves, which results in what we describe as an "expectation gap". For instance, local authorities with an unmodified audit opinion are often described as having "got the big tick" or similar. The implication is that an unmodified audit opinion means that everything has been checked and is fine.

In fact, an annual audit has a much narrower and more technical focus. The basic task of an auditor is to give an opinion on whether the information within the financial statements that the local authority has produced can be relied on. In local government, that task is broadened to cover information about service performance as well as the information in the financial statements. All of the auditor's work is directed towards being able to form this opinion.

Auditors do not check everything. They check the systems and processes that help produce the information that is subject to audit and check selected transactions within those systems. The auditor's work is based on the concept of "materiality". An auditor does not need to be concerned with transactions or aspects of the business that are too small to have a material effect on the information being reported. Auditors report on their work to the governing body of the local authority and to the public in the audit report that accompanies the local authority's annual report.

There is a popular misconception that auditors have checked that every transaction has been properly entered into and recorded. Auditors cannot and do not do this.

Although every audit report spells out what an audit involves and the limits of an audit opinion, we find that governors and managers often do not understand the audit function well. The risk is that they rely too much on the work of an auditor and do not take adequate steps to manage risks using the other tools available to them.

It is important that those governing or working in public entities take the time to ensure that they understand what assurance they can take from the work of the auditor.

Some lessons for elected members

Understand the governance role in the particular entity

No two public entities are the same. They organise themselves in a way that suits their needs, and tailor structures and systems to suit their circumstances. Local authorities' needs and circumstances change over time, particularly when an election results in changes to the elected members.

Therefore, it is important for new members of governing bodies to familiarise themselves with how the governance role works in that organisation at that time. Taking an active interest in the development of the governance statement required by section 40 of the Act after each election is a good way of becoming familiar with the main responsibilities, structures, delegations of authority, and systems for the flow of information and advice.

Use the various sources of support intelligently

This Part has outlined the main sources of support available to elected members when they carry out their governance role. Understanding these sources, their strengths and weaknesses, and how they can be used to provide a richer overall picture of an issue is an important skill. Relying too much on one source of assurance or for the wrong matters can create risks for the local authority.

Pay attention to indicators of organisational risk

Many organisations have a system for identifying, managing, and monitoring risks, both at project and organisational levels. Alongside these formal systems, elected members can draw on many other informal indicators to identify possible risks. These indicators include the number and nature of:

  • complaints that the organisation receives (patterns or trends that might indicate a weak area or problem, how the number and range of complaints compares to those received by similar organisations, whether issues are resolved quickly or are persistent);
  • matters that are raised with external scrutiny bodies, such as the Office of the Ombudsman, Office of the Auditor-General, and Privacy Commissioner;
  • legal challenges that the organisation faces (including external challenges and internal corporate matters, such as personal grievances);
  • media queries and comments; and
  • concerns that are raised directly with elected members in their role as community representatives.

Do not be afraid to ask the dumb question

In paragraph 1.9, we mentioned the importance of common sense. When we inquire into matters that have gone wrong in a public entity, members of a governing body or senior managers will often tell us that they never really understood the advice they received. They accepted it because it was technical and others seemed happy. We strongly encourage elected members to have the courage to "ask the dumb question" and to demand that the information and advice they receive is clear and meaningful.

A good advisor should be able to explain advice in plain language. In the end, a public entity's governors are responsible for all its decisions and actions. Accountability means that you have to be able to explain publicly what you have decided and why, when asked.

That does not mean that a member of a governing body needs to become an instant expert in all relevant technical disciplines. It is appropriate to seek expert advice and rely on it. However, over time, an elected member should become familiar with the relevant tools and concepts. Developing a reasonable working knowledge helps an elected member understand when they need expert advice, to test that advice when it is received, and to understand its implications.

Use external scrutiny to make your local authority better

It is natural to resist external scrutiny – nobody enjoys being criticised. However, the strongest organisations are those that accept that there is always room to improve and that embrace every opportunity to get a fresh perspective on their work. The various complaints processes, external audits, and other reviews all provide opportunities for an organisation to see itself through the eyes of others. Sometimes this can reveal blind spots and weaknesses that other systems have not identified.

The governors of the organisation can set the tone that these opportunities are valuable rather than threatening, creating a culture that values transparency, accountability, and continuous improvement.

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