Audit Committee Effectiveness In Victorian Local Government

396 Pages·2013·2.55 MB·English

Audit Committee Effectiveness in
Victorian Local Government

Aquinas John Purcell

Bachelor of Business (Swinburne University)
Bachelor of Economics (Monash University)
Graduate Certificate in Fraud Investigation (La Trobe University)
Master of Business Administration (La Trobe University)

School of Law
Faculty of Business and Law
Victoria University

Submitted in fulfillment of the requirements of the
degree of Doctor of Philosophy

November 2012
Abstract

The tenets of local government are based on strong financial probity, adherence to independence
principles to avoid conflict of interest and conformance to ethical principles.

This thesis addresses the issue of possible corruption and misconduct in local government, with
particular reference to the role of the audit committee. The primary research question is: ‘Do audit
committees in Victorian local government function effectively?’ The secondary research question is:
‘Do the investigations into local government maladministration and malfeasance enhance governance
and the audit committee’s effectiveness?’ Qualitative and quantitative data were collected to develop a
model of audit committee effectiveness through a pilot survey, research questionnaire and interviews.

The research used a questionnaire based on a ‘factorial design’ to measure the perceptions, attitudes
and perspectives of mayors, chief executives and chairs of the audit committee. The results were
compared with perceptions of committee members of the Local Government and Shires Association
of New South Wales and board members of the Municipal Association of Victoria as the
representative bodies of local government in New South Wales and Victoria respectively.

The research established support from mayors, chief executives and chairs of audit committees for the
primary research proposition, but no support for the secondary research proposition. There was a
similarity of views in relation to: (1) inputs of an audit committee (charter, skills, activities,
communications and induction and training); (2) the behavioural nuances of the rigour of: debate,
trust and effective communications; and (3) the relationships with councillors and management. It
was found that an audit committee’s effectiveness was perceived to be limited by: (1) the ability to
attract and retain skilled independent members; (2) the variability of expertise and the skills of the
councillor audit committee members; (3) the level of continuing professional development for the
councillor audit committee members; (4) the ‘gaming’ behaviours associated with manipulation of
agendas, control of information and the omission of critical data from the audit committee; (5) power
games associated with the appointment of councillor members to the audit committee; and (6)
domination of the audit committee by one or two members or management.

The suggested way forward is to have an audit committee in local government which can provide the
effective oversight of organisational governance processes with a specific focus on behavioural
outcomes.

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Student Declaration

Student Number: 3793755

Family Name: Purcell

Given Names: Aquinas John

Principal Supervisor: Emeritus Professor Ronald Francis
School of Law
Faculty of Business and Law, Victoria University
Melbourne, Australia

Second Supervisor: Professor Colin Clark
Executive Dean
Faculty of Business and Law, Victoria University
Melbourne, Australia

Date: Original Submission 4 August 2011
Revised 31 July 2012
Accepted 12 December 2012

This thesis was submitted in fulfillment of the requirements for the degree of Doctor of Philosophy at
Victoria University, Melbourne, Australia.

Doctor of Philosophy Declaration

‘I, Aquinas John Purcell, declare that the PhD thesis entitled, Audit Committee Effectiveness in
Victorian Local Government, is no more than 100,000 words in length including quotes and exclusive
of tables, figures, appendices, bibliography, references and footnotes.

This thesis contains no material that has been submitted previously, in whole or in part, for the award
of any other academic degree or diploma. Except where otherwise indicated, this thesis is my own
work’.

Signature …………………… Original Submission 4 August 2011
Revised 31July 2012
Accepted 12 December 2012

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Acknowledgements

I was motivated to undertake this research by Mr John Bennie, chief executive officer, Greater
Dandenong Council. From mid-2001 to late 2006, when John was chief executive officer,
Manningham City Council, I was its internal auditor from late 2003 to mid-2007. John advocated for:
(1) high standards of public sector integrity; (2) rigorous governance processes in local government;
and (3) a strong and active audit committee. He was the catalyst for the reinvigoration of the audit
committee and the internal audit processes at Manningham City Council and stands as a beacon for
governance, probity and propriety in local government in Victoria.

My interest in the research would not have continued without the support of my Principal Supervisor,
Emeritus Professor Ronald Francis, School of Law and my Co-Supervisor, Professor Colin Clark,
Executive Dean, Faculty of Business and Law, Victoria University. Dr Andrea Diamond, former chief
executive officer, Yarra City Council and current chief executive officer, Monash City Council and Dr
Despina Whitefield, Senior Lecturer, School of Accounting and Finance, were appointed by Victoria
University as my industry and research mentors. My supervisors were demanding, but never
discouraging and my research has been further shaped by their theoretical contributions and humour.
I cannot imagine a better supervisory team.

Special thanks are reserved for the mayors, councillors, chief executives and chairs of audit
committees who willingly participated in the research and to Mr Geoff Rankin, former Chief
Executive, CPA Australia who provided access to the members of CPA Australia with public sector
audit committee experience. This revised thesis also acknowledges Mr Terry Richards, who proof
read the original two volumes in July 2011 and Dr Diane Brown, who copy edited the revised thesis in
June 2012.

This thesis is dedicated to: (1) my spouse, Ms Charlotte Chidell and my children, Elizabeth and
Matthew; (2) Mr Gary Galvan; (3) Dr Colin and Mrs Ruth McKenzie; (4) Dr Duncan McKenzie; (5)
Dr Ronald and Mrs Penny McKeran; (6) the late Dr Arthur Plant; and (7) the late Warrant Officer
(Class 2), ‘Jack’ Sheather (Royal Australian Infantry). These people have been influential mentors
throughout my personal and professional life and I am grateful for their input into my intellectual and
professional development.

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List of Publications

Purcell, A. J. 2012, ‘Corruption and misconduct in local government in Australia: What we know, but
have trouble understanding and explaining, IIA Australia Journal, Issue 01, March, pp. 35-40.

Purcell, A. J. (forthcoming), ‘A Behavioural Perspective on Audit Committees in Victorian Local
Government’ IIA Australia Journal.

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TABLE OF CONTENTS
Abstract I
Student declaration II
Acknowledgements III
List of publications IV
Table of contents V
List of cases XI
List of statutes XII
List of regulations XIII
List of figures XIV
List of tables XVI
Abbreviations and conventions XVIII
1. CHAPTER ONE: INTRODUCTION 1
1.1. Objectives 1
1.2. Local government in Australia 1
1.2.1 Local government in Victoria 1
1.2.2 Audit committees in Victorian local government 2
1.3. Accountability 3
1.4. The research 3
1.5 Theoretical basis and constructs of the research 4
1.6. Sub-research questions 6
1.7 Assumptions and definitions associated with the research 9
1.7.1 Integrity and honesty 10
1.7.2 Effective governance 10
1.7.3 The dark side of leadership 10
1.7.4 Investigations into local government administration 10
1.7.5 Audit guidelines for local government 11
1.8 Limitations 11
1.8.1 No previous research into Victorian local government audit committees 11
1.8.2 Research bias 12

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1.8.3 Investigations into local government administration 12
1.9 Structure of the thesis 12
1.10 Summary 14
2. CHAPTER TWO: GOVERNANCE 15
2.1 Corporate governance 16
2.1.1. Context of corporate governance 16
2.1.2 Historical perspective of governance literature 22
2.1.2 Corporate governance practice in Australia 24
2.2 Governance theories 30
2.2.1 Agency 31
2.2.2 Stewardship theory 34
2.2.3 Resource dependency theory 35
2.2.4 Behavioural theory 36
2.2.5 Other theories 37
2.2.5.1 Decision making 37
2.2.5.2 Power and market control 37
2.3 Public sector governance 39
2.3.1 Principles of public sector governance 39
2.3.2 Public sector governance in the Commonwealth of Australia 43
2.3.3 Public sector governance practice in Victoria, Australia 44
2.3.4 Other public sector organisations that support public sector governance 46
2.4 Governance in Victorian local government 47
2.5 Summary 57
3 CHAPTER THREE: AUDIT COMMITTEES 58
3.1 Background to effectiveness of audit committees 58
3.2. Effectiveness of audit committees 62
3.2.1 Review of the literature 62
3.2.2 Context of the audit committee literature 68
3.2.3 Role of the audit committee 72
3.2.4 Recent audit committee literature 73
3.2.5 Audit committee literature in Australia 75
3.3. Application of governance theories to audit committees 76
3.3.1 Institutional theory 76
3.3.2 Resource dependency theory 79
3.3.3 Managerial hegemony theory 80
3.3.4 Behavioural theory 81
3.4 Attributes of audit committee effectiveness 83
3.4.1 Composition 84
3.4.2 Authority 85
3.4.3 Resources 86
3.4.4 Diligence 87
3.5 Public sector audit committees 88

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3.6 Local government audit committees 93
3.7 Measures of audit committee effectiveness 98
3.8 Relevance of the literature 100
3.9 Summary 102
4 CHAPTER FOUR: INQUIRIES INTO LOCAL GOVERNMENT 103
4.1 Background 103
4.2 Context of corruption and misconduct 106
4.3 Literature review 116
4.3.1 Corruption and politics 116
4.3.2 Corruption in government 118
4.3.3 Professional misconduct 119
4.3.4 Professional misconduct and professional ethics 124
4.3.5 Bias in decision making 126
4.3.6 Management of gifts 128
4.4 Local government corruption and misconduct 129
4.4.1 Council governance and maladministration 130
4.4.2 Financial mismanagement 134
4.4.3 Corruption and misconduct by councillors and staff 134
4.4.3.1 Victoria 134
4.4.3.2 New South Wales, Queensland and Western Australia 135
4.4.3.3 United Kingdom 138
4.4.4 Breach of statutory powers 139
4.5 Some insights into unethical behaviours 142
4.6 A way forward? 143
4.7 Summary 146
5 CHAPTER FIVE: METHODOLOGY 148
5.1. Introduction 148
5.1.1 Rationale for research 149
5.1.2 Overview of research methodology 149
5.2. Methodology 151
5.2.1 Paradigms 151
5.2.2 Justification of the paradigm 154
5.2.3 Phenomenology 155
5.2.4 Naturalistic inquiry 156
5.2.5 Grounded theory 157
5.2.6 Rationale for selection of grounded theory 159
5.3. Methods 159
5.3.1 Mixed methods 160
5.3.2 Justification of the method 161
5.3.3 Research design 164
5.3.4 Quantitative approach 166

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5.3.5 Qualitative approach 167
5.3.6 Factorial design 167
5.4 Pilot study 170
5.4.1 Response rate from the pilot survey 172
5.5 Confirmation of the research instrument – Questionnaire 174
5.6 Finalisation of the research instrument – Questionnaire 176
5.7 Summary of results 178
5.7.1 Results from the research 178
5.7.2 Early and late respondents 183
5.7.3 Analysis of variances 186
5.8 Summary 193
6. CHAPTER 6: RESEARCH FINDINGS 195
6.1 Response rates from quantitative research 195
6.2 Acceptability of response rate 197
6.3 Demographic and firmographic analysis 199
6.3.1 Demographic analysis of respondents 199
6.3.2 Firmographic analysis of respondents 201
6.3.3 Differences between responses of metropolitan and rural councils 203
6.4 Detailed observations from quantitative research 203
6.4.1 Results – Establishment of the audit committee 203
6.4.2 Results – Forming an audit committee 207
6.4.2 Results – Knowledge and expertise of the audit committee 210
6.4.4 Results – Induction and training for the audit committee 213
6.4.5 Results – Managing the audit committee 216
6.4.6 Results – Risk assessment and financial reporting 221
6.5 Results from qualitative research 226
6.6 Detailed observations from qualitative research 226

6.6.1 Clarification of issues 226
6.6.1.2 Induction and training 227
6.6.1.3 Managing the audit committee 229
6.6.1.4 Oversight of management of corruption and misconduct allegations 230
6.6.1.5 Risk assessment and financial reporting 231
6.6.1.6 Contributing reasons for response rates 233
6.6.2 Impact of ethical statements on audit committee outcomes 234
6.6.3 Influences on the audit committee 236
6.6.4 Inputs and outcomes for audit committees 237
6.7 Summary 243
7 CHAPTER SEVEN: SUMMARY AND CONCLUSIONS 244
7.1 Summary of findings 244

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7.1.1 Quantitative research 244
7.1.2 Qualitative research 247
7.1.3 Implications for audit committees 249
7.2 How research questions are answered 252
7.3 Limitations of the research 254
7.4 What do these answers mean? 256
7.5 How does this relate to theory? 259
7.6 Suggestions for further research 269
7.7 Conclusions and a way forward 270
REFERENCES 273
APPENDICES 304
APPENDIX 1 SUMMARY OF INVESTIGATION REPORTS INTO LOCAL GOVERNMENT
304
Appendix 1.1 Local government investigations, Victoria 304
Appendix 1.3 Local government investigations, New Zealand and the United Kingdom 316
APPENDIX 2 PILOT SURVEY 321
Appendix 3 Pilot survey response - Mr Wayne Cameron 326
APPENDIX 4 OBSERVATIONS FROM THE PILOT SURVEY 329
Appendix 4.1 Overview of local government audit committees 329
Appendix 4.2 Mayors 332
Appendix 4.3 Councillors 333
Appendix 4.4 Chief executives 333
Appendix 4.5 Local government independent audit committee members 335
Appendix 4.6 External auditors 336
Appendix 4.7 Other suggestions 338
APPENDIX 5 SURVEY OF AUDIT COMMITTEES – LOCAL GOVERNMENT
COUNCILS/SHIRES 340
APPENDIX 6 QUANTITATIVE RESULTS 353
Appendix 6.1 Total responses 353

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