Auditor queries investment policy

Auditor Price Waterhouse Cooper has warned Gosford Council about its investment policy following an $8.8 million drop in the value of its investments.

The auditor warned that the council risks not being able to carry out projects or work due to the level of money it has invested during current "volatile and liquid market conditions".

PriceWaterhouseCooper partner Mr WM Russell said the value of council's investments had reduced by $8.8 million.

He "strongly recommended" that council carefully monitor its future cash requirements in the context of ensuring sufficient cash resources were available to meet future financial commitments and project obligations.

He also strongly recommend that council review its investment policy and incorporate appropriate limits in the type of securities in which it can invest to ensure the security of council funds.

"As 30 June 2007, council has net current asset deficiency of $10,117,000 as compared to a net current asset surplus of $19,510,000 at 30 June 2006 and $50,888,000 in 2005," Mr Russell stated.

"In other words, the total current assets that council is expected to realise in the coming year meet the total current liabilities is deficient by approximately $10 million.

"This is referred to as the current ratio and is a measure of the liquidity of council.

"Council's current ratio has decreased from 2.05 at 30 June 2005 to 1.38 at 30 June 2006 to 0.82 at 30 June 2007.

"It is acknowledged that not all current liabilities will need to be paid out in the coming year, for example current liabilities includes all employee entitlements.

"Australian Accounting Standards require all employee entitlements to which an employee has an unconditional right to be included in current liabilities even though experience may indicate that not all entitlements will be taken by the relevant staff in the coming year.

"Notwithstanding this situation however, the deterioration in the position is cause for significant concern."

Mr Russell said the deterioration was largely due to council, since 2005, committing an "increasing amount" of funds to investments with maturity dates greater than 12 months.

"In other words, assets categorized as 'non-current' rather than 'current assets," Mr Russell said.

"In 2007 this amounted to $109,959,000; 2006, $71,715,000 and 2005, $27,849,000.

"However, subsequent to 30 June 2007, global investment and financial markets have been subject to events which have resulted in a period of high volatility and market uncertainty which may impact the market value, recoverability, liquidity, cash flows and rates of return of various investment products such as Collateralised Debt Obligations (CDO's) and Floating Rate Notes (FRN's).

"At present, a number of these types of investment products are experiencing volatile and liquid market conditions which has impacted market values and the ability to convert these types of investments into cash.

"Council's non-current investment securities in 2007 comprised approximately $51,213,000 in CDO's and $58,746,000 in FRN's.

Mr Russell also stated that the "increasing complexity and sophistication" of various investment products available had highlighted the need for councils to have a thorough understanding of the nature of the products they were investing and council's rights and obligations in the context of compliance with various legislative and other regulatory requirements and council's internal policies.

Audit report 2007 Gosford Council