A specialist accounting firm that works with councils appears to have shed more light on the cause of Central Coast Council’s financial woes.
LG Solutions looked at Council’s publicly available and audited financial statements in October 2020 after the Council financial position became public and said it had to “pick itself up off the floor after what it found”.
“Little did we know when we started the review that we would uncover far more than we bargained for.”
The company held back on publishing its regular industry newsletter and notified its findings to Council, the Department of Local Government and the NSW Audit Office.
LG Solutions said they never heard back from any of those three organisations or from the council association, Local Government NSW and, therefore, published its findings in early November in its industry newsletter to which every council in NSW subscribes.
The summary of mistakes outlined in the November article lines up with the December 2 Interim Report presented by Central Coast Council Administrator, Dick Persson.
Persson said in his December report that a significant reason for the financial situation was the impression that $129.5M was unrestricted cash and, therefore, available to fund operating expenses.
LG Solutions added that the problem started in 2016 and continued undetected through three years of audited financial statements.
The business urged other councils to check their financial statements for the same problem.
It outlined numerous recent State Government changes to reporting, which LG Solutions says needed to be changed again, to improve financial reporting.
LG Solutions, which provides specialist accounting and financial management advice to NSW councils, started its story by looking at Central Coast Council’s 2018-2019 financial statements.
It was looking for warning signs that could be used by councils around NSW to try to avoid a similar financial drama.
At first, on the face of it, the audited statements suggested nothing untoward, said the article in the industry newsletter published by LG Solutions in November.
“But before we stopped … we took one more look at restricted cash, cash equivalents and investments,” the article says.
It found the way Council reported its restricted water funds and sewer funds led to a $129.5M error.
Worse, the problem did not appear to be confined to one year.
There appeared to be the same error in the two previous years, which brings it back to the time of amalgamation in May 2016.
The 2016-2017 statements appear to have reported an under-statement of $37.9M the article says.
Analysis by LG Solutions suggested that the 2017-2018 audited financial statements reported an under-statement of $88.8M.
“We suggest that the results of the disclosure errors have seemingly cascaded over a three-year period to the point where Central Coast Council’s financial position has seemingly imploded,” the article says.
“How could an apparent under-statement of $129,500,00 in externally restricted cash and investments be given an unqualified audit opinion,” the article asks.
“Such an under-statement is material in so many ways and without doubt, if correct … it casts a completely different light on Central Coast Council’s financial position and ability to pay its liabilities and to fund its future budgets (as early as June 20, 2019).
“As a minimum, if the under-statement is, in fact, correct … then quite clearly the Council’s actual unrestricted cash was, at best nil, and, at worst, a deficit of $78,564,000 at June 20, 2019.”
LG Solutions listed suggestions to help other councils stay out of the same trouble, saying the State Government’s efforts to reduce red tape and de-clutter had not helped reporting.
Suggestions included re-instating restricted assets and liabilities throughout the Code of Accounting Practice and Financial Reporting for NSW Councils and to re-instate the June quarterly budget review statement (June QBRS).
“Over the past three years … the Code has slowly been whittled away to remove any and all traces of (the below the line) externally restricted assets and liabilities that are such a material part of local government accounting – all seemingly for the sake of de-cluttering,” the article said.
“As year-end financial preparers will know … all that has been retained in the Code relating to external restrictions is the disclosure of restricted cash and investments.
“As we have pointed out in past Code submissions to the Office of Local Government, the removal of externally restricted disclosures has removed both the awareness and visibility of what assets are available / not available for general use and what liabilities need to be funded through specific revenue sources,” the article says.
LG Solutions said it had always been negative about removing the June quarterly budget review statement (QBRS).
“Not only is it a question of budget transparency and the fact that the year-end financial statements do not follow the same level of detail (and accountability) as the QBRS requirements but the act of preparing and reviewing a June QBRS sets up and includes a lot of year-end financial statement preparations, ensuring missing expenditure is accrued, carrying forward through the balance sheet expenditure relating to next year and revenue relating to next year,” the article says.
“Plus, if you look at the reporting deadlines for year-end generally and take this year-end as a specific example where councils have until November 30 to finalise their year-end financial statements … it is apparent that it could be between five and seven months before both council and community can see a set of final budget versus actual comparatives for the 2019-2020 financial year.
“A five to seven month ‘budget reporting hole’ would seem to be a problem waiting to happen and surely not good for transparency or accountability.”
The article goes on to give a number of detailed ideas for councils to improve their financial reporting.
It wraps up by saying: “Time will tell whether Central Coast Council amends, or is directed to amend, its year-end 2018-2019, 2017-2018 or 2016-2017 year-end audited financial statements”.