Regular financial reports to council are required by Section 138 of the Local Government Act 1989 and are a critical part of good management. They are the prime means by which council receives the information it needs to meet its accountability requirements.
WHY IS FINANCIAL REPORTING IMPORTANT?
Councillors need to be confident that the information is robust and accurate. It should be presented to them in a way that is simple and easy to understand. It should also be supported by appropriate independent advice and evidence.
Well functioning and independent internal auditing helps provide validity and assurance to the financial monitoring process. It also ensures there are no surprises for either council or the administration.
COUNCILLORS’ RESPONSIBILITY FOR FINANCIAL REPORTING
Councillors are collectively responsible for the overall financial viability of the council. They exercise this accountability through careful review of any variances in the budget. Council’s accountability is for the big picture and this should be its focus.
Councillors cannot simply rely on the assurance from the administration that all is well. As they are ultimately accountable, they must ensure they understand what ‘all is well’ means. If it turns out that all is not well, then councillors will be under scrutiny.
Council may establish a committee or nominate a councillor to provide leadership on financial accountability. This may improve the management of financial matters, but does not reduce the individual and collective accountability of elected members.
MONITORING PERFORMANCE AGAINST BUDGET
The Local Government Act states that financial reporting must occur at least every quarter. Each council can determine the frequency of reporting so that it not only meets the accountability requirements but also takes into account what is feasible given the available resources. As a general guide, monthly reporting is considered to be good practice. The key measures should be cash resources, operating results, balance sheets and financial Key Performance Indicators (KPIs).
Getting the big picture
Reporting should have a whole-of-council focus. In other words, council should be getting the big picture. Favourable and unfavourable variances need to be highlighted in a way which helps councillors understand the impact of the variances on the budget and what remedial action can be taken. The report should also include analysis and insightful commentary on the key variances, as well as a statement about their impact on the full-year’s figures.
The council also needs to ensure that the budget has been properly adjusted to take into account monthly patterns in expenditure and income. Being told that every variance is a timing issue is just an excuse and should raise questions about the veracity of the financial information provided. As a general rule, the budget needs to be re-forecasted at least every six months, although three months is desirable.
Councillors need to check that the actual figures are reconciled and prepared on an accrual basis. While these are accounting concepts, councillors need to satisfy themselves that the information they are given reflects the real situation. A handy prompt is cash in the bank. If this is fluctuating wildly or reducing over time without proper explanation, councillors are entitled to be concerned.
A financial report should not be reviewed in isolation. It should be seen in the context of other KPIs, which relate to achievement of council’s goals. It’s not simply enough to come in on budget, if there are significant shortcomings in the achievement of goals.
ANNUAL FINANCIAL STATEMENT
The annual financial statement is an important reflection of the council’s stewardship of financial resources over the past year. It is one of a series of important components of the annual report that measure council’s performance.
Councillors should not have to be accountants to understand the financial reports. They need to be certain that the report will help them understand what is happening by asking the following questions:
- Is it based on reliable data? Are there lots of end-of-year adjustments? Are the explanations for these acceptable?
- Are appropriate strategies being put forward for addressing significant end-of-year variances when future budgets are prepared?
- Are councillors confident in the audit process?
- Are the auditors raising lots of important issues?
- Is a consistent reporting framework being used?