Risky business: strengthening fraud and integrity controls over local government grants

By Julian Hammond, David Catanese, Rory O’Connor and Alexandra Lane

In a recent assurance report directed to the Victorian Parliament, the Victorian Auditor-General’s Office (VAGO) has strongly criticised the lack of consistent use of fraud controls within several Victorian councils. As part of the assurance report, VAGO undertook audits of a number of councils in relation to their allocation of local government grants.

Given that between 2020 to 2021 local councils in Victoria distributed over $45 million in grants, the potential implications of grant fraud and conflicts of interest in the grant process are significant.

Critically, VAGO made nine recommendations for all local Victorian councils to implement. These are set out in detail below.

What was involved in VAGO’s assurance audits?

In conducting audits and preparing the assurance report, VAGO’s purpose was to objectively assess how well fraud controls were designed and whether they operated as intended at each of the local councils.

The audit spanned five years and assessed Hume City Council, Knox City Council, Loddon Shire Council, Southern Grampians Shire Council, Warrnambool City Council and West Wimmera Shire Council.

What did VAGO’s assurance report conclude?

The VAGO assurance report concluded that local councils are not:

• consistently identifying conflicts of interest;
• assessing applications against criteria;
• documenting decisions properly;
• checking how funds are used; or
• evaluating their grant programs' outcomes.

In some concerning instances, fraud controls were missing entirely from the governance and integrity framework of local councils.

VAGO’s assurance report made the following key findings:

• None of the audited councils applied their fraud controls consistently across their grant programs. In VAGO’s opinion, this had the consequence that those councils would be exposed to a much higher risk of fraud.
• While all audited councils required their staff to declare conflicts of interest, none had an overarching grants policy in place that paid attention to declaring conflicts in this context.
• Two of the councils audited did not use consistent criteria to assess the eligibility of grant applications. Because of this, it was not possible for VAGO to scrutinise why certain applications were or were not eligible or approved over others.
• At two local councils, councillors were active members of the assessment panels for some grant programs. VAGO concluded that this left room for favouritism and bias.
• While the audited councils provided fraud training to council staff and councillors, there was no formalised requirement that all staff involved in the administration of grants complete this training. VAGO found that 50% of councillors from the audited councils had not completed the fraud training. It was of concern to VAGO that these councillors approved 70% of the grants made in 2020.
• At three local councils, the assessors in grant programs altered their initial recommendations without documenting reasons for the variation. Further, only half of the audited local councils consistently advised applicants of the reasons for their unsuccessful applications. The lack of written reasons may clearly undermine transparency in grant processes and decision making.
• Only two audited councils consistently applied an acquittal process in comparing the expended funds against their intended and approved use.

How can councils improve their fraud and corruption controls?

As set out above, VAGO’s audits identified a number of deficiencies in the administration of grant programs by local councils.

In response VAGO made nine overall recommendations for all local councils in Victoria to enact.

These recommendations are that councils must:

1. Improve their conflict-of-interest policies by requiring and documenting a declaration for each application and documenting how the council manages conflicts of interest.
2. Develop and document an eligibility and assessment criteria for all grant programs and communicate outcomes to unsuccessful applicants.
3. Exclude councillors from assessing and making recommendations on grant applications.
4. Verify that all grant recipients use grant funds as intended.
5. Evaluate the benefits of recurring and non-recurring grants. In the case of recurring grants, councils should require recipients to seek future funding through existing competitive grant programs.
6. Document all funding decisions within a centralised system to ensure decision is transparent, including assessments against eligibility criteria and determination of funding amounts.
7. Develop an overarching grants policy that sets out detailed information in relation to the process.
8. Include grant-related fraud risks in the council’s risk and fraud corruption plans.
9. Develop mandatory training for all staff involved in the grants process. This training should cover:
   1. declaring and managing conflicts of interest;
   2. fraud risks specific to grant programs; and
   3. Council’s relevant policies and procedures.

Key takeaways

Local councils should immediately take this opportunity to review and critically assess the governance and fraud controls in their grant programs and consider what improvements may be made to minimise the risk of grant-related fraud occurring.

Failure to do so may expose local councils to investigations by the IBAC or the Local Government Inspectorate. More importantly, in instances where no governance or fraud control framework is in place, councils will be at a significant risk of fraud.

At a time when community concern with integrity of government decision-making is at an all-time high (as reflected in the recent Federal election), the consequences of failures of governance, integrity or fraud control may be significant – from investigations by integrity bodies to the appointment of monitors to ultimately the potential dismissal of Council. While VAGO’s enquiry was directed at local government, the good governance principles VAGO described (as set out above) are equally important for State governments and public entities.