Understanding the Legal Risks under the new Audit, Risk and Improvement Committee legislative scheme

The Commercial team discuss this important topic.

What legal risks do Western Australian local governments face under the new Audit, Risk and Improvement Committee (ARIC) framework, and how can they ensure compliance with the Local Government Act 1995?

The new ARIC framework, commencing fully on 30 June 2026, expands the governance responsibilities of Western Australian local governments by requiring oversight of audits, risk management, compliance, and organisational improvement. Local governments face legal and regulatory risks if they fail to comply with requirements relating to committee establishment, membership, governance practices, shared committee arrangements, or delegations of authority. To minimise these risks, local governments should establish compliant ARICs on time, implement robust governance frameworks, provide member training, and regularly review their delegations and compliance processes.

Introduction

From 30 June 2026, when the new Audit, Risk and Improvement Committees (ARICs) are fully established under the Local Government Act 1995 (the LG Act) in Western Australia, local governments will face various legal risks attributable to increased statutory obligations.

The ARICs were introduced into the LG Act as part of the Local Government Amendment Act 2024 to ensure that local governments have more robust measures in place for effective governance, accountability, and continuous improvement in their operations and risk management practices. The changes aim to address not just the financial audit responsibilities that concerned the previous iteration of the committee but also provide oversight on broader risk and performance improvement areas. This broader oversight reflects an effort to ensure comprehensive governance practices, which includes risk management and organisational enhancement.

Non-compliance with these requirements could result in legal challenges and regulatory scrutiny. Local governments must ensure that ARICs are established and operated in strict compliance with the legislative framework to mitigate these risks.

Analysis of Legislative Changes

To understand the legal risks involved with the new ARIC regime, it is useful to start by looking at the key legislative changes. These changes, many of which are outlined in Part 7, Division 1A of the LG Act – Audit, risk, and improvement committee, aim to establish and outline the functions, membership, and regulations governing these committees.

The new requirements can be loosely grouped into four areas as follows:

1. Establishment and Membership;
2. Functions of ARICs;
3. Shared Committees; and
4. Delegations to ARICs.

 

1. Establishment and Membership

Section 7.1A of the LG Act introduces mandatory requirements for local governments to establish ARICs no later than six months after the ‘amendment day’, or 30 June 2026. These committees are composed of members who cannot be employees of the local government or individuals nominated by its employees. Councillors can be committee members, but importantly, council members of the local government or any other local government cannot serve as the presiding or deputy presiding members.

While regulatory and statutory responsibilities from the old system persist between 1 January and 20 June 2026, any failure to transition properly and within the mandated timeline could present significant non-compliance risks and legal consequences.

Similarly, non-compliance with the requirements of membership composition post 30 June 2026, such as ensuring that the presiding member is not a council member or a member of another local government, would expose the local governments to legal repercussions.

2. Functions of ARICs

The functions of ARICs include receiving and reviewing reports related to audits, compliance audits, and other reviews under the LG Act. ARICs also recommend actions for improvements to financial management, legislative compliance, and risk management systems. They are tasked with monitoring actions taken concerning significant audit findings under section 7.12A of the LG Act and advising councils on necessary follow-ups or other improvements.

In practical terms, effective governance will necessitate robust oversight, transparent processes, and compliance with prudential and ethical standards. For instance, ensuring ARIC follows its written charter, reporting appropriately to the council, and maintaining sufficient independence to oversee risk and audit matters are crucial governance obligations. Poor governance practices or failure to manage risks effectively may result in legal liability or administrative action against the local government under both statutory and common law principles.

3. Shared Committees

Section 7.1CB of the LG Act provides for the option of two or more local governments establishing a shared ARIC. This provision requires an agreement between the local governments outlining appointment and approval procedures for its members, a mandate that presiding and deputy presiding members cannot be council members, and additional governance mechanisms to manage the shared structure.

This change offers an opportunity for resource-sharing, which is particularly important for smaller regional councils. However, it also introduces additional legal risks. Local governments must ensure that all appointments are approved by an absolute majority from each local government involved and that the committee complies with membership restrictions. Any failure to adhere to these requirements could result in disputes or legal challenges.

4. Delegations to ARICs

Section 7.1C of the LG Act permits local governments to delegate specific powers and duties to ARICs. These include powers and duties related to the council’s audit functions and other prescribed matters. Importantly, regulations under section 7.13 of the LG Act may outline additional functions for ARICs.

The delegation of powers to ARICs is limited to those under Part 7 of the LG Act or any prescribed power or duty. For example, for committees composed solely of council members, the council may delegate any powers or duties except those that require an absolute majority decision or any powers or duties prescribed by regulation or other written laws. On the other hand, for committees comprising council members and employees, only powers or duties that may be delegated to the Chief Executive Officer (CEO) under Division 4 of Part 5 can be delegated to the committee.

Improper delegation or failure to ensure the legality of delegated powers could expose local governments to legal risks. Local governments must carefully review their delegations to ensure compliance with section 7.1C of the LG Act.

Recommendations

Local governments face significant legal risks with the establishment of ARICs, particularly compliance and governance risks. To mitigate these risks, local governments should:

1. Ensure timely establishment of ARICs in compliance with section 7.1A of the Local Government Act 1995;
2. Develop and implement robust governance frameworks and written charters for ARICs;
3. Provide training to ARIC members on their legal obligations, including conflict of interest disclosures;
4. Review and update delegations to ensure compliance with section 7.1C of the LG Act; and
5. Monitor the operations of ARICs to ensure adherence to statutory and governance requirements.

By taking these steps, local governments can minimise their exposure to legal risks and ensure the effective operation of ARICs.

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*The information provided in this website serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.