Administrator says governance around 2016 policy change “beggars belief”

Rik HartRik Hart - Council Administrator. Image CCN, June 2021

Central Coast Council Administrator, Rik Hart, says the State Government should either monitor NSW councils’ restricted funds or get rid of them altogether and let councillors and community decide how to spend their money.

“Beggars belief” was how Hart described Central Coast Council’s change in how it reported restricted funds – a change made without legal advice (just prior to the merger and administration).

Hart made the comments while talking about the change in reporting introduced back in 2016 that meant more than $88M of restricted funds were written up as unrestricted funds at the start of the merger of the former Wyong and Gosford councils.

Watch the CCN video interview with Mr Hart at Wyong Chambers after the council meeting.

In fact, the Council had less than $5M in unrestricted funds when it merged, an amount that Hart said was nowhere near enough for a half a billion dollar business.

But he also said it was an academic argument because the way the unrestricted funds were presented in the financial statements was not the way they were accounted for internally by the Council.

The internal accounting was in line with the Local Government Act.

Up until the merger in May, 2016, the former Gosford and Wyong councils, both of which were water authorities, had historically accounted for unrestricted water and sewer cash as restricted as per the Local Government Act 1993.

Upon merger, the accounting treatment was changed by creating a voluntary accounting policy reported in the May 12, 2016, financial statements for both councils.

For the full press conference following the Council meeting – Watch here:

“That this occurred without legal opinion and was never questioned by anyone beggars belief,” Hart said at a June 1 extraordinary meeting.

The meeting was called so Council could respond to the Auditor General’s qualified opinion of Council’s 2019-2020 financial statements.

Council said the previous reporting of restricted funds as unrestricted were prior years’ reporting errors.

The Auditor General called it a change in policy.

Hart said that unless adjudicated through a court sometime, the public was left with two legal opinions.

“But call it this way, the Auditor General’s advice from the Crown Solicitor is 95 per cent in favour of what we did and five per cent in favour of the Auditor General,” he said.

His report to the meeting noted that: “It is important to note that the change in voluntary policy treatment upon merger amounted to a reclassification of over $88M of water and sewer funds as unrestricted cash for Council.

“This appears to be a material change to be made without a formal accounting position paper or legal opinion.

“The notes to the 2016 financial statements identified that the result of the voluntary change in accounting policy was to improve the unrestricted current ratio, which is a key ratio determining whether the merged councils were ‘Fit for the Future’.

“There is no evidence that Council ‘argued’ for the change in accounting policy.

“For that reason, Council is surprised that, when taking over in 2017, the Audit Office did not more heavily scrutinise the governance decisions that underpinned that earlier decision of Council.

“Particularly since the audit opinion for 2016 offered a disclaimer of opinion because there was insufficient appropriate audit evidence to provide a basis for an audit opinion.

“Furthermore as reported in the statement by management in the 2016 Financial Statements, Council’s then CEO Rob Noble and responsible accounting officer, Stephen Naven, were unable to fully attest to the completeness and accuracy of the balances contained within the income statement and classifications of equity within the financial reports.

“Moreover, a full analysis of externally restricted cash balances had not been undertaken to allow management to assert that the balance is correctly stated in accordance with the relevant legal obligation that gave rise to the required restriction.

“Council has no record that a position paper supporting any change to the accounting policy was prepared or considered.

“Any such change to an accounting practice ordinarily requires Council and senior staff (Chief Financial Officer) to sign off, and this did not occur.

“The Chief Executive Officer at the time has confirmed to me that he was totally unaware any such accounting policy had been put in place.

“I am surprised that the Auditor General or the Audit Risk Improvement Committee (ARIC) did not pick this up, noting it occurred for four consecutive years.”

As for the future, Hart pointed out that the Office of Local Government has recommended that NSW councils no longer be required to report on their unrestricted cash positions.

“If you are going to have restricted reserves and make it sacrosanct, then you have to, in inverted commas, police it,” he said.

“I believe removing this requirement could result in more councils breaching both their internal and external restricted funds.

“In my opinion, it would be sensible for all councils to be reporting on a quarterly basis on their unrestricted funds and their internally and externally restricted funds.

“And the Auditor General as part of their annual audits of all councils of NSW, audit the balance of those funds at year end.

“The Central Coast will report on a monthly basis, profit and loss statements and cash flows both by the internet and council meetings.”

Hart said the government needed to make up its mind on internal and external fund accounts.

If it wanted to keep them, it needed to monitor them, councils needed to be required to report on them and they needed to be audited.

“The other option is to take (restricted funds) away,’ he said.

“This option would allow the community and council to decide together how that money is spent and allow democracy at the end of term, for the community to decide if the councillors had done the right thing with those monies.”

Meanwhile, Hart supported the recommendation from the Auditor General calling on the Office of Local Government to clarify the legal framework relating to restrictions of water, sewerage and drainage funds.

Merilyn Vale