Financial management
Councils manage significant finances on behalf of their communities. The responsible management of these finances is essential for the council to continue to provide the services and facilities that are needed by the local community.
Principles of sound financial management
The Local Government Act (section 136) provides four principles of sound financial management for councils. All councils are required to implement these principles and establish budgeting and reporting frameworks that are consistent with the principles.
The principles of sound financial management require councils to:
- manage financial risks prudently, having regard to economic circumstances
- pursue spending and rating policies that are consistent with a reasonable degree of stability in the level of the rate burden
- ensure that decisions and actions have regard to financial effects on future generations
- ensure full, accurate and timely disclosure of financial information relating to the council
The financial risks that must be managed prudently include:
- the level of council debt
- commercial or entrepreneurial activities
- management and maintenance of assets
- management of current and future liabilities
- changes in the structure of rates and charges
Audit Committees
All councils are required to establish audit committees. Audit committees are advisory committees that play a key role in assisting councils to fulfil their responsibilities. Their objectives are various and include:
- enhancing the credibility and objectivity of financial reporting
- supporting identification and management of financial and other risks
- ensuring compliance with laws and regulations
While an Audit Committee will pay particular attention to the council’s financial management, its role is not limited to financial matters. An Audit Committees also provides advice on broader aspects of the council’s operations, particularly where compliance issues and risks areinvolved.
An Audit Committee has no executive role. It is independent of management and acts independently from the council’s finance committee. The Audit Committee’s reports to the council and provides advice to facilitate decision-making by the council.
It is recommended that Audit Committees include a majority of independent members and that council CEOs and senior managers should not be members of the committee, although they may assist the functioning of the committee by attending meetings and providing administrative support.
Contracts
Councils may enter into contracts for goods or services or for the carrying out of works. Section 186 of the Local Government Act requires that a council must give public notice and invite tenders or expressions of interest before it enters into a contract which has a value of $100,000 or more.
Some exemptions apply to this requirement and a council is not required to accept the lowest priced tender.
Entrepreneurial activities
Section 193 of the Local Government Act gives councils the power to engage in various types of enterprises, such as becoming a member of a corporation or partnership, or participating in a joint venture with another body.
However, the Act places certain requirements on councils to ensure the proper management of risks in such cases. This includes a requirement that a council consider a formal risk assessment report from a suitably qualified person before approving any such venture where the total risk exceeds $100,000 or 1% of council’s rate revenue.
If the total risk exceeds $500,000 or 5% of rates income, the council must also obtain the approval of the Minister for Local Government, and if it exceeds $5 million, the Treasurer’s approval is additionally required.
Linked page opens in a new window