Agenda of Audit and Risk Committee

I hereby give notice that an ordinary meeting of the Audit and Risk Committee will be held on:

Date:

Time:

Meeting Room:

Venue:

Tuesday, 16 September 2014

1.30pm

Reception Lounge
Auckland Town Hall
301-305 Queen Street
Auckland

Audit and Risk Committee

OPEN AGENDA

MEMBERSHIP

Chairperson	Cr Sir John Walker, KNZM, CBE
Deputy Chairperson	Cr Dr Cathy Casey
Members	Cr Cameron Brewer
	Cr Bill Cashmore
	Mr Paul Conder, CA
	Cr Sharon Stewart, QSM
	Mr Roy Tiffin, FCA
	Cr Penny Webster
Ex-officio	Mayor Len Brown, JP
	Deputy Mayor Penny Hulse

(Quorum 4 members)

Mike Giddey

Democracy Advisor

10 September 2014

Contact Telephone: (09) 307 7565

Email: mike.giddey@aucklandcouncil.govt.nz

Website: www.aucklandcouncil.govt.nz

Audit and Risk Committee

16 September 2014

ITEM TABLE OF CONTENTS PAGE

1 Apologies 5

2 Declaration of Interest 5

3 Confirmation of Minutes 5

4 Petitions 5

5 Public Input 5

6 Local Board Input 5

7 Extraordinary Business 5

8 Notices of Motion 6

9 Office of the Auditor-General 7

10 2013/2014 group and council annual financial statements 9

11 2014 annual report Management Letter 121

12 Update on Audit New Zealand report issues 123

13 Update on Risk Management Activities 127

14 Consideration of Extraordinary Items

PUBLIC EXCLUDED

15 Procedural Motion to Exclude the Public 131

C1 Update on Council Controlled Organisation Risk 131

C2 Update on Internal Audit Activities 131

C3 Update on Integrity and Investigation Activities 132

1 Apologies

At the close of the agenda no apologies had been received.

2 Declaration of Interest

Members are reminded of the need to be vigilant to stand aside from decision making when a conflict arises between their role as a member and any private or other external interest they might have.

3 Confirmation of Minutes

That the Audit and Risk Committee:

a) confirm the ordinary minutes of its meeting, held on Tuesday, 22 July 2014, including the confidential section, as a true and correct record.

4 Petitions

At the close of the agenda no requests to present petitions had been received.

5 Public Input

Standing Order 3.21 provides for Public Input. Applications to speak must be made to the Committee Secretary, in writing, no later than two (2) working days prior to the meeting and must include the subject matter. The meeting Chairperson has the discretion to decline any application that does not meet the requirements of Standing Orders. A maximum of thirty (30) minutes is allocated to the period for public input with five (5) minutes speaking time for each speaker.

At the close of the agenda no requests for public input had been received.

6 Local Board Input

Standing Order 3.22 provides for Local Board Input. The Chairperson (or nominee of that Chairperson) is entitled to speak for up to five (5) minutes during this time. The Chairperson of the Local Board (or nominee of that Chairperson) shall wherever practical, give two (2) days notice of their wish to speak. The meeting Chairperson has the discretion to decline any application that does not meet the requirements of Standing Orders.

This right is in addition to the right under Standing Order 3.9.14 to speak to matters on the agenda.

At the close of the agenda no requests for local board input had been received.

7 Extraordinary Business

Section 46A(7) of the Local Government Official Information and Meetings Act 1987 (as amended) states:

“An item that is not on the agenda for a meeting may be dealt with at that meeting if-

(a) The local authority by resolution so decides; and

(b) The presiding member explains at the meeting, at a time when it is open to the public,-

(i) The reason why the item is not on the agenda; and

(ii) The reason why the discussion of the item cannot be delayed until a subsequent meeting.”

Section 46A(7A) of the Local Government Official Information and Meetings Act 1987 (as amended) states:

“Where an item is not on the agenda for a meeting,-

(a) That item may be discussed at that meeting if-

(i) That item is a minor matter relating to the general business of the local authority; and

(ii) the presiding member explains at the beginning of the meeting, at a time when it is open to the public, that the item will be discussed at the meeting; but

(b) no resolution, decision or recommendation may be made in respect of that item except to refer that item to a subsequent meeting of the local authority for further discussion.”

8 Notices of Motion

At the close of the agenda no requests for notices of motion had been received.

Audit and Risk Committee

16 September 2014

2013/2014 group and council annual financial statements

File No.: CP2014/12739

Purpose

1. To inform the Audit and Risk Committee of the outcomes and issues encountered during the 2014 Annual Report audit process.

Executive summary

2. The Governing Body, at the meeting to be held on 25 September 2014, will be asked to adopt the annual report for Auckland Council. Preparing and publishing an annual report is a legislative requirement. The annual report covering the twelve months to 30 June 2014 has been prepared by council officers and audited by Audit New Zealand. The report compares and comments on the performance of council against the budgets and operating targets set in the annual plan. The Audit and Risk Committee will review and make a recommendation on the report to the Governing Body.

Recommendation/s

That the Audit and Risk Committee:

a) receive the 2013/2014 Annual Report.

b) note that there are no significant outstanding audit issues in respect of the audit of the 2013/2014 Annual Report for group and Auckland Council.

c) recommend the 2013/2014 Annual Report for group and Auckland Council to the Governing Body for adoption.

Comments

3. The Audit and Risk Committee’s terms of reference include

· Review with the external auditors, the findings of their work including management explanations.

This report, together with the report from Audit New Zealand, assists the committee to fulfil that duty. In brief, it is the role of the Audit and Risk Committee to review the quality of the annual report, and the processes applied by management to prepare the report. It is the role of the Finance and Performance Committee to review and enquire into the financial and operational performance of the group.

4. Asset revaluations

The group has an accounting policy to report major asset classes at fair value. To meet this, the classes of assets are revalued on a three yearly cycle. On this basis operational land and buildings were revalued at June 2012 and restricted land and buildings (parks and reserves) at June 2013.

With the very rapid rise in the value of land in the Auckland region we assessed whether the current values recorded in our accounts still reflected fair value. Our conclusion was the current carrying value especially land, was significantly below fair value. To correct this, the group commissioned a revaluation of all land and building assets.

The revaluation added $1,189 million to the value of land and buildings. The accounting treatment required $412 million to be recorded in the Statement of Comprehensive Income as net other gains, with the balance as other comprehensive income.

As part of the normal cycle of revaluations roads ($699 million increase) and the art gallery collection ($4 million reduction) were revalued.

5. Impairments

Each year we must examine the value of all assets to ensure they are not over-valued. This review determined the book value of the diesel trains being replaced by the new electric units was well in excess of the expected sales value. Consequently the diesel units were impaired or written down by $28 million.

6. Auckland International Airport dividend

During the year the group received dividends of $120 million from the 22.4 per cent shareholding in Auckland International Airport Ltd (AIAL).

This dividend income does not appear in the group accounts, Note 6 discloses $7 million of dividends received. Because the group holds 22.4 per cent of AIAL we record as income 22.4 per cent of the airport’s net income, not the dividends received. This is presented in the Share of surplus in associates and jointly controlled entities line in the Statement of Comprehensive Income. The dividend does appear in the statement of cash flows where cash dividends received are shown as $130 million.

7. Disclosures

The size of the financial statements is growing each year as more detailed disclosures are required by the financial reporting standards, New Zealand Stock Exchange and the Local Government Act 2002.

To assist readers we have changed the order of some of these disclosures. Section One of the financial statements is the formal financial accounts with accompanying notes required by the reporting standards. This section provides detailed financial information on the group.

The Local Government Act is requiring more detailed disclosures by local authorities. The regulations are generally very specific as to what is to be disclosed and how it will be displayed. Further, some of these requirements are not consistent with the formal financial accounts. Given the source and nature of these disclosures we felt it was preferable to group them together in a separate section referred to as Section Two.

This section includes the new benchmark and core asset information required by the recently passed regulations.

Section Three contains the specific disclosures required by the New Zealand Stock Exchange and other exchanges.

In the Themes and Activities volume of the annual report we disclosed revenues and costs for each group of activities. The form of the funding impact statement is specified in the Local Government Act. There is an anomaly in the regulations as they require us to compare actual performance against that planned in the Long-term Plan. All other finances are compared against the budget for the reporting year. For consistency with other financial statements and to make the funding impact statement more meaningful for the reader we have added the budget information. That is, we disclose the Long-term Plan and budget. We have noted another council has made a similar addition.

8. Provisions

At the end of each year we undertake a comprehensive review of all provisions. Our largest provision is for the liability for weather tightness claims; $263 million.

The review of claims data by the actuary we engage to assess the provision indicated a greater slowdown in the number of new claims and change to the value of settlements than previously forecast. Based on this new data the provision has been reduced by $61 million.

Council Controlled Organisations (CCOs)

To prepare the consolidated or group accounts each CCO provides a reporting pack. The information in the pack is confirmed by the auditor of the CCO.

The financial information of all CCOs was consolidated to form the group financial statements.

Consideration

Local board views and implications

9. The report highlights activities and achievements in local board areas. Local boards’ views were sought in identifying these highlights.

Maori impact statement

10. The processes and technical accounting issues related to the annual report have no specific impact on Māori outcomes.

Implementation

11. Not applicable.

Attachments

No.	Title	Page
a View	Volume 3 - Financial Statements	13
b View	Summary financial statements (Overview)	117

Signatories

Author

Robert Nelson - Financial Controller

Authorisers

Kevin Ramsay - Manager Finance

Grant Taylor - Governance Director

Audit and Risk Committee

16 September 2014

Audit and Risk Committee

16 September 2014

2014 annual report Management Letter

File No.: CP2014/20289

Purpose

1. To update the Ccmmittee on the audit of the 2014 annual report.

Executive summary

2. Audit New Zealand and council’s finance staff have not been able to prepare the Management letter from the 2014 annual report in time for this meeting. No major issues occurred during the audit.

Audit New Zealand will provide a briefing paper and be in attendance at the meeting to brief the committee on the audit. The interim management report was presented to the 22 July 2014 meeting which covered findings arising from the interim audit visits.

Recommendation/s

That the Audit and Risk Committee:

a) receive the 2014 annual report Management Letter report and the briefing paper provided by Audit New Zealand.

Comments

3. At the conclusion of each audit, Audit New Zealand provide a management letter in which they detail the findings of the audit. In particular, they highlight areas where the organisation’s control environment and processes may be in need of improvement. The normal process has been for Audit New Zealand to provide a draft letter to the finance management who provide responses to the issues raised. It was found this process took too long resulting in delayed reporting to this committee.

4. This year an improved process has been introduced in which management engage with audit to collect comments as the audit progresses and the letter is prepared.

5. Audit New Zealand and council’s finance management set an aspirational goal to present the completed management letter to the September meeting of the Audit and Risk Committee. While the new process shortens the time to prepare the final Management letter, having it completed for the September Audit and Risk Committee meeting is a little too ambitious. In addition the management letter should be finalised and sent after the audit report is signed which is not until 25 September 2014.

6. The next scheduled meeting of the Audit and Risk Committee is in December. As this will be five months after year-end it is proposed to circulate the management letter when completed in late September or early October, and then to include on the December agenda.

7. The committee may like to consider alternative means to have a timely communication of the management letter in future years.

8. From a management perspective, there have been no major or significant process or audit issues for the council financial statements or the group report. One CCO, Regional Facilities Auckland, was late providing information for the consolidation and gaining audit clearance.

9. To provide the committee with a level of assurance for the review of the annual report audit, Audit New Zealand will provide a briefing paper and report on the audit at the meeting.

Consideration

Local board views and implications

10. No impact.

Māori impact statement

11. No impact.

Implementation

12. None.

Attachments

There are no attachments for this report.

Signatories

Author

Robert Nelson - Financial Controller

Authorisers

Kevin Ramsay - Manager Finance

Grant Taylor - Governance Director

Audit and Risk Committee

16 September 2014

Update on Audit New Zealand report issues

File No.: CP2014/20796

Purpose

1. This report summarises the progress made to resolve the items raised by Audit New Zealand.

Executive summary

2. During the year reports have been provided to the Audit and Risk Committee meeting outlining the progress made to address and resolve recommendations previously made to the council by Audit New Zealand. This report provides an update on this progress.

Recommendation/s

That the Audit and Risk Committee:

a) receive the Update on Audit New Zealand report issues report.

Comments

3. A year ago, at the September 2013 meeting of the Audit and Risk Committee a report was tabled by the Controller and Auditor-General on the final audit findings for the year ending 30 June 2013 and this report provided a status on the progress council had made in regard to previous recommendations. The report noted that although there had been some progress in addressing recommendations, there were items which had not been dealt with in a timely manner.

To address the situation we have put in place a process to ensure that the recommendations made are addressed and resolved. We have made progress in getting a significant number of the matters raised by Audit New Zealand resolved.

At 1 July 2013 there were 51 items to be addressed.

The recommendations range from items which have arisen to address policy or processes which need to be implemented or amended, to recommendations to improve the quality of some reporting or identification of future work required to address issues such as implementation of International Public Sector Reporting Standards.

The process developed included a step where council made its own assessment as to the status of an item but required Audit New Zealand to specifically confirm that they agreed that the matter had been resolved before the status was updated.

Audit New Zealand is currently finalising their management report, which will be the point where the final status of the individual items will be recorded, however, based on our discussions following the field work performed by Audit New Zealand, the table below provides the draft status of the 51 items.

51	Items identified at 30 June 2013.
14	Items confirmed as resolved by Audit New Zealand in the 2014 interim management letter.
3	New items added as a result of work performed by Audit New Zealand at their interim audit in 2014.
40	Confirmed as outstanding, awaiting assessment at the commencement of final audit.
15	Items tentatively agreed as issue resolved.
6	Items tentatively agreed as resolved because there are no specific outstanding issues but as they are projects that are either ongoing or large, Audit New Zealand will maintain a “watching brief” to check ongoing progress on implementation.
19	Items where progress had been made during the year, but further work is required (includes the three new items identified at the interim audit).

Therefore during the year, 35 of the starting 51 items have been resolved.

The 19 items in progress are:

	Area responsible
· development of templates and guidance documents in respect of contract and supplier management activities	Procurement
· development of a competency framework for contract management	Procurement
· ensuring consistency of contract management practices including documentation, allocation of contingencies and extension of scope.	Procurement
· improving business plan preparation prior to carrying out major procurements	Project Management
· implementation of consolidated reporting for large projects that span a number of years and cover activities across council and its CCOs for all project dimensions.	Project Management
· development of a quality plan for the NewCore Programme	Information Services
· improve IS process in regard to backup documentation, retention policy and restore strategies	Information Services
· the process for terminating IS users and disabling their access to council systems be reviewed and improved	Information Services
· regular review of people who can access Auckland Council's and Revera datacentres.	Information Services
· implement a process to reconcile the fixed assets register and the asset management systems.	Financial Plan Policy and Budgeting
· processes to be reviewed to ensure legislative requirements are met regarding rates setting	Financial Plan Policy and Budgeting

· continue to improve non-financial performance measures	Financial Plan Policy and Budgeting and Financial Control
· development of policy and processes for the revaluation of green assets	Financial Control
· review the Internal Audit function including coverage for CCOs, reporting lines should be formalised and aligned with best practice	Internal Audit
· continue to ensure consistency in the application of the service centre cash receipting processes	Customer Services
· development of a formal legislative monitoring system	Legal Services
· adoption and implementation of a fraud risk framework	Integrity and Investigations
· continue to develop risk management framework	Risk Management
· work with the CCOs to review their delegated financial authorities so that the limits in SAP for the CCOs align to their respective delegation policies	Accounting Services

Auckland Council will continue with our programme to implement the recommendations made and work closely with Audit New Zealand to resolve the items.

Consideration

Local board views and implications

4. Local boards have not been consulted because the report deals primarily with internal management issues.

Māori impact statement

5. The report does not have any particular benefit or adverse effects on Māori.

Implementation

6. No issues.

Attachments

There are no attachments for this report.

Signatories

Author

Robert Nelson - Financial Controller

Authorisers

Kevin Ramsay - Manager Finance

Grant Taylor - Governance Director

Audit and Risk Committee

16 September 2014

Update on Risk Management Activities

File No.: CP2014/19724

Purpose

1. This report summarises the activities undertaken by the Risk Management department since the last report to the Audit and Risk Committee in July 2014.

Executive summary

2. The Risk Management department continued to implement the Enterprise Risk Management Policy and Framework as per the Enterprise Risk Management Strategic Plan 2012-17.

Recommendation/s

That the Audit and Risk Committee:

a) receive the Update on Risk Management Activities report.

Comments

3. Organisation-wide Risk Registers

Risk Management is currently working on implementing a risk management system across council. This project is underway to collate all existing risk registers within council to provide the required single point visibility.

4. Top Risks

An Executive Leadership Team (ELT) workshop was completed in August to identify top risks for council. Upon further evaluation and finalisation, the top risks would be communicated to the committee at a future meeting.

5. Operational Risk

Key operational risks are reported to the Executive Leadership Team in the monthly performance report. Management are continuing to focus on key risks and improving the risk culture across Council. There has been increased communication and action regarding the embedding of risk management into processes.

6. Targeted Risk Review

The Information Services (IS) Risk Review is in progress and due for completion by the end of the first quarter of this financial year.

7. Enterprise Risk Management Framework

The ERM Framework identifies risk categories with relevant risk tolerance limits. To ensure adequate mitigation is in place, specific risk frameworks are being continually developed in high risk/strategic areas to get greater coverage from a risk management perspective. The following are in progress:

o Programme and Project Risk Framework – The Project Management Framework at council provides a standard approach of managing projects with clear gateway, performance monitoring and progress reporting, project hub, roles and responsibilities, tools and training, guidelines and collaboration. Within this framework, risk management was clearly integrated within the processes.

o Liability Risk Framework – to ensure that council minimizes potential risk exposures around financial liability, through contractual arrangements, health and safety and other regulatory or compliance requirements, the team continues to work with the relevant areas, as and when required. Risk Management continues to collaborate with Procurement, Legal Services and Insurance to bring consistency in managing Professional Indemnity and Public Liability insurance requirements across council. In addition, the transformation of the Health & Safety programme continues.

o Treasury Risk Framework – quarterly and ad hoc meetings, as appropriate, are held with the Treasury team to review treasury risks, potential non-compliance to policy and emerging risks in the debt markets. A new Treasurer was appointed and other key person risks are currently being managed by People and Capability.

o Asset Management Planning – Council is exposed to considerable risks due to the scale of the assets it owns and manages. Risk Management is working closely with the Asset Management Planning team to further embed risk management requirements. A steering committee was established and Risk Management continues to provide risk guidance.

o Fraud Risk Framework – we continue to work closely with the Ethics and Integrity Officer to minimize fraud risks and assist as and when required.

8. Risk Management Workshop

Risk Management team continue to provide guidance to Management and business areas. Workshops were completed for Executive Leadership Team and the Procurement department.

9. CCO Engagement

CCO engagement is ongoing as part of the risk management strategies. There is continued communication with the relevant CCO Risk Leadership Group and assistance provided as and when required, with continued focus being on the CCO Review.

10. Project Risk Management

Risk Management provides advice and support to the various project teams by ensuring risks are identified, documented and monitored as part of the Programme and Project Risk Framework.

The projects that Risk Management is involved in are:

o NewCore

o Workplace Strategy

o The Southern Initiative

o Asset Management Planning

o Payment Card Industry Data Security Standards (PCIDSS)

o Waiheke Library

o Lopdell House and Gallery Refurbishment

o Project Connect

o NorSGa

o Quay Street Seawall

o Auckland Harbour Bridge SkyPath

o Revaluation and Rates

Consideration

Local board views and implications

11. Local boards have not been consulted because the report primarily deals with internal management issues.

Māori impact statement

12. This report does not have any particular benefit or adverse effects on Maori.

Implementation

13. None

Attachments

There are no attachments for this report.

Signatories

Author

Aashmita Naikar - Risk Manager

Authorisers

Alan Brookbanks – People & Capability Director

Grant Taylor - Governance Director

Audit and Risk Committee

16 September 2014

Exclusion of the Public: Local Government Official Information and Meetings Act 1987

That the Audit and Risk Committee:

a) exclude the public from the following part(s) of the proceedings of this meeting.

The general subject of each matter to be considered while the public is excluded, the reason for passing this resolution in relation to each matter, and the specific grounds under section 48(1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution follows.

This resolution is made in reliance on section 48(1)(a) of the Local Government Official Information and Meetings Act 1987 and the particular interest or interests protected by section 6 or section 7 of that Act which would be prejudiced by the holding of the whole or relevant part of the proceedings of the meeting in public, as follows:

C1 Update on Council Controlled Organisation Risk

Reason for passing this resolution in relation to each matter

Particular interest(s) protected (where applicable)

Ground(s) under section 48(1) for the passing of this resolution

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 7.

s7(2)(h) - The withholding of the information is necessary to enable the local authority to carry out, without prejudice or disadvantage, commercial activities.

In particular, the report contains financial and operational information and details of audit findings which if released may jeopardise the commercial operations of the Council Controlled Organisations.

s48(1)(a)

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 7.

C2 Update on Internal Audit Activities

Reason for passing this resolution in relation to each matter

Particular interest(s) protected (where applicable)

Ground(s) under section 48(1) for the passing of this resolution

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 7.

s7(2)(h) - The withholding of the information is necessary to enable the local authority to carry out, without prejudice or disadvantage, commercial activities.

In particular, the report contains financial and operational information and details of Internal Audit activity which if released may jeopardise the effective delivery or Internal Audit services.

s48(1)(a)

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 7.

C3 Update on Integrity and Investigation Activities

Reason for passing this resolution in relation to each matter

Particular interest(s) protected (where applicable)

Ground(s) under section 48(1) for the passing of this resolution

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 6.

s6(a) - The making available of the information would be likely to prejudice the maintenance of the law, including the prevention, investigation, and detection of offences and the right to a fair trial.

In particular, the report contains financial and operational information regarding investigation and other activity, which if released may jeopardise the effective delivery of our Integrity and Investigative services.

s48(1)(a)

The public conduct of the part of the meeting would be likely to result in the disclosure of information for which good reason for withholding exists under section 6.

Author	Mike Giddey - Democracy Advisor
Authoriser	Grant Taylor - Governance Director