Part 1: Our recent work on governance in local authorities

Local government: Results of the 2013/14 audits.

In last year's report, Local government: Results of the 2012/13 audits, we considered the challenges of the governance role, particularly for elected members. We discussed the various sources of support available, and highlighted some lessons for elected members.

Because the theme for our 2014/15 work programme is Governance and accountability, we have continued our focus on governance matters arising from our recent reports.

In this Part, we discuss the main issues arising from those reports. We cover:

Making good decisions

Elected members have an obligation to ensure that the decisions they make on behalf of their communities are made in a robust and transparent way. Good decisions create community confidence and trust, and should be informed by reliable and effective supporting information and advice. Our comments below reflect the importance of elected members engaging in ongoing reflection about how best to understand and improve their decision-making responsibilities while appropriately managing risks.

We comment on two important decision-making areas here – rating practices and asset management.

Rating practices

In our report last year, we highlighted some rating practices that did not comply with statutory requirements. Some local authorities justified these practices as being pragmatic. We stated our view that a pragmatic approach was an unacceptable risk, particularly given that the power to set rates is a power to tax people for services provided. Rating practices needed to improve.

Because the annual audit is conducted at the end of the financial year in review, when rates have already been set for the following financial year, we were conscious that there would be instances where deficient rating practices would still be evident for rates set for 2013/14. Local authorities would not yet have had the chance to take corrective action from our previous year's audit work.

We have observed that some local authorities did indeed experience similar problems with rating compliance in 2013/14. We have again seen inconsistencies between information contained in the rates resolution and the funding impact statement. The inconsistencies seem to be largely a result of poor internal practices, internal quality control deficiencies, and a lack of attention to the detail of legal requirements.

The wording for every rate contained in the rates resolution must mirror the wording contained in the funding impact statement. There must also be enough information in the funding impact statement for ratepayers to determine their individual rates charges.

We expect to see a marked improvement in rates set by local authorities for 2014/15. After our work in 2012/13, many local authorities sought legal advice on problems drawn to their attention by our auditors, and will have improved their processes. We expect to see improved and effective rating practices, aligned with statutory obligations, in the future.

Elected members need to be satisfied that, when they resolve to adopt rates, their rates resolutions are legally effective. This is a critical governance role for elected members. Ratepayers will hold local authorities to account for failing in this responsibility.

Asset management

Local authorities are responsible for more than $100 billion of assets that provide essential services to communities. Our recently published report, Water and roads: Funding and management challenges, assessed the approach that local authorities are taking to managing their infrastructure assets.

The report highlighted that, while most local authorities' planning and decision-making about infrastructure is adequate for short-term to medium-term planning, more work is needed to ensure that long-term planning decisions are sound. This is largely because local authorities do not make the best use of data to support their decisions and need to give greater consideration to potential changes in the local economy over time.

Decisions made about assets have a long-term effect on communities. Ongoing maintenance, renewal, and, ultimately, replacement costs represent the actual cost of the asset borne by ratepayers. Also, decisions invariably create an expectation in the community about the level and quality of service they will receive from the asset, which they expect to be consistently delivered during the life of the asset. It means that the decisions that elected members make about assets are critical. In our experience, this is something that local authorities have not always done well.

Our water and roads report highlights that, between 2007 and 2013, local authorities consistently spent less than they had forecast to spend on capital works, including asset renewals. Further, we estimate that the gap between asset renewal expenditure and depreciation could be between $6 billion and $7 billion by 2022.

Without good information, elected members and their communities will struggle to understand, and make effective choices about, their future needs. Local authorities need to build their capability to more effectively use asset condition and network performance information so that robust decisions can be made about managing infrastructure needs into the future.

Recent amendments to the Local Government Act 2002 now require local authorities to prepare a 30-year infrastructure strategy in their long-term plans. This strategy will identify significant infrastructure issues, options, and implications for the local authority and its community over 30 years.

The strategy will be a useful planning tool for local authorities, provided the supporting information about asset condition and performance is robust.

We will be reviewing infrastructure strategies as part of our audits of local authorities' 2015-25 long-term plans, and we plan to report on this in future.

Managing risks

Good governance requires elected members to manage uncertainties and gain assurance that organisational risks are being identified and appropriately managed. There are a number of tools available to elected members to support them in this function, and some of these were discussed in our previous report, Local government: Results of the 2012/13 audits.

Audit committees

Audit committees can make a valuable contribution to effective governance arrangements and are a key mechanism for supporting elected members to develop an assurance picture of the entity's overall risk.

Effective committees usually consist of 4-6 members, have an independent Chairperson, and have some independent members with a good balance of skills and expertise, and all members are willing to challenge and question.

We have observed an increasing number of audit committees being established in local authorities since the start of the 2013-16 triennium, with many undergoing a significant transformation in structure and purpose.

However, the results of a survey we recently conducted of audit committees in the local government sector show that, while almost 80% of local authorities have audit committees, only 64% are considered effective. Less than a third of audit committees have an internal audit review function, and two-thirds do not have independent members.

Retaining ineffective audit committees provides limited value. We encourage local authorities to consider whether the current structure and purpose of their audit committees could be improved.

We recently published a discussion document, Making the most of audit committees in the public sector. We hope that this will contribute to a wider conversation about the effectiveness of audit committees, focusing on things that do work and things that do not work. We will be publishing the feedback we receive on our website (

Health and safety reform

Health and Safety is a current topic of conversation in discussions with local authority chief executives and Mayors. This is due to changes proposed to the Health and Safety in Employment Act 1992 by the Health and Safety Reform Bill, which is currently before Parliament and is intended to come into effect in late 2015.

As currently drafted, the Bill would require those in governance roles to proactively manage workplace health and safety by exercising due diligence to ensure that their organisation complies with its duties. This positive due diligence duty also applies to elected members, although the Bill would exempt elected members from prosecution for a breach of that duty.1

Managing health and safety risk is an important governance function, which is often overseen by the Audit Committee. The external auditor does not have a specific role to play in ensuring legal compliance in health and safety matters, and so will be concerned with legal issues only where a failure could have a material effect on the financial statements; for example, if the organisation has to cease operations for a period due to a health and safety failure.

Ensuring legal compliance with health and safety law is the responsibility of the local authority, and elected members as governors should ensure that they understand their obligations.

Conflicts of interest

We are regularly asked to consider conflict of interest matters. It is an area that causes a great deal of confusion because the issues are often not clear cut.

This was the cause of our recent report, Ashburton District Council: Allegations of conflicts of interest affecting decisions on a second bridge, which considered how three elected members of Ashburton District Council managed conflict of interest questions in relation to decisions being made about a project to build a second bridge across the Ashburton River.

Our report concluded that the choice each councillor made in relation to managing their individual non-financial conflict of interest risk was reasonable.

There was a separate matter in relation to whether one councillor should have withdrawn due to a perception of bias or predetermination. The councillor in question was provided with legal advice obtained by the Council, which concluded that he would probably be perceived as biased and so his participation could create a legal risk to the decision being made. The councillor obtained his own legal advice, which provided a different view. The councillor considered all the advice, and ultimately decided that his responsibility to his community outweighed the risks and he did in fact take part in the vote. We found that, although it was a reasonably significant decision to not follow Council advice, it was a decision he was entitled to make.

Determining matters of conflict is rarely clear or straightforward. Elected members have to weigh up a number of competing considerations and, in the end, must make their own decision unless it is a clear financial conflict. In the interests of openness and fairness, we encourage elected members to exercise their decision-making responsibilities with due care and, if in doubt, to err on the side of caution.

Governance of council-controlled organisations

Effective local authority governance often involves elected members achieving their desired outcomes through subsidiaries and council-controlled organisations (CCOs). We are interested in the governance and accountability of CCOs and note that the number of such entities has increased steadily since enactment of the Local Government Act 2002.

A number of structural reviews of subsidiaries have been undertaken by local authorities recently, indicating that local authorities are turning their minds to the question of whether current governance structures are effective and best meet their needs.

We are currently reviewing the governance and accountability arrangements between local authorities and CCOs, with a specific focus on the various accountability mechanisms in place, strategic alignment between the CCO and its parent local authority, and effectiveness of the monitoring arrangements in place.

In a 2001 report, we proposed five principles for good governance of CCOs:2

  • the subsidiary entity should have a clearly defined purpose;
  • the subsidiary entity's governing body should be effective;
  • the parties involved should be assigned clear roles and responsibilities;
  • the local authority should be able to hold the subsidiary entity to account; and
  • mechanisms for accountability to the community must be in place.

Our subsequent work suggests that those principles remain relevant.

We have observed that good relationships are as important as having the right structures and processes in place. The relationship between a parent local authority and its CCO is more effective when the local authority is clear about its purpose for establishing and maintaining the CCO, and when that purpose is equally clear to the CCO. A local authority should be able to clearly express the rationale for the CCO to its community and should be confident that a CCO structure is the best one for achieving its objectives.

The governance function of elected members in monitoring the performance of their CCOs is critical to ensuring accountability to the community. This function works best when everyone is clear about their respective roles and responsibilities. In addition, the use of informal mechanisms to supplement the formal monitoring framework is important in promoting positive and constructive engagement between local authorities and their CCOs.

We expect to publish our report on CCOs later in 2015.

1: Ministry of Business, Innovation and Employment, Questions and Answers – Health and Safety Reform Bill.

2: Local Authority Governance of Subsidiary Entities, March 2001, pages 10-11.

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