The auditor general's office has found multiple examples of risks Loddon Shire is running, in a document likely to have implications for many more councils and the $45 million they collectively spent on community grants last financial year.

The report found that six councils' fraud controls were not always well-designed or operating as intended.

"In some cases, they are missing," auditors found.

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It is increasing the risk of fraud unnecessarily and making it harder for audited councils to show their grant programs are "transparent, equitable and benefit the community," they said.

The council has raised concerns about "some accuracy" in the report but has broadly accepted a raft of recommendations.

The report cites a series of events auditors examined at the Loddon Shire, which were used as case studies and examples of potential issues councils could address.

That included evidence a Loddon Shire councillor voted on a $20,000 grant for a community facility, even though they chaired the committee that managed it.

"In this case, the local ward councillor and the applicant were the same person," they found.

"While Loddon staff were aware of this, they did not consider how it could lead to a conflict of interest.

"For example, a local ward councillor could discourage other potential applicants from applying for a grant to reduce competition for their own application."

The report did not suggest that the councillor tried to discourage other potential applicants.

It did question why the councillor was not excluded from the decision-making process over the community facility's kitchen improvements.

It also asked why the council did not review or comment on the applicant's original request for $150,000 for improvements, well above the $20,000 a council officer estimated would be needed.

Auditors said the process lacked transparency "because Loddon does not require councillors to keep records of potential applicants that have approached them".

Councillors' decisions could be influenced by direct engagement with a potential applicant, underscoring the need for transparency, the report said.

Loddon responded to the auditors by saying it was standard practice for staff to assess grant applications and make recommendations before they are presented at council meetings.

Auditors found all councils they examined could improve conflict of interest processes, develop new guidelines for grants and improve transparency.

Reviewed grant records to identify potential fraud could help councils find out if staff or councillors had connections to past recipients, auditors said.

Those sorts of connections do not always indicate fraudulent behavior but councils should oversee them nevertheless, auditors said.

Loddon Shire approved a grant without acknowledging a potential conflict of interest in 2021.

A councillor's family member had applied for a $400 grant on behalf of a community group.

The family member used the councillor's portal account apply for the grant, "which meant the application was lodged under the councillor's name", auditors said.

The councillor is not involved with the community group.

A shire staff member approved the application as it met the eligibility criteria.

"However, it is unclear if they knew the councillor was not involved with the community group," auditors said.

"We found no evidence in council records that the staff member considered this."

The auditors' report does not suggest fraudulent activity took place.

Auditors found Loddon had some "better practice" arrangements, including mandatory fields for assessors to declare conflicts of interest in every grant application.

It also consistently sent letters to those who had failed to win grants saying why they had not been successful.

Auditors found several other councils did not consistently do that, which raised transparency concerns.

The shire has been working on an overarching grants policy, which it said was being timed to allow staff to consider the auditor general's findings.

In May 2019, a club applied to the shire for a $16,390 grant to install a disabled toilet.

The council assessment stated: "Good project. This has been fully designed and planned and is ready to proceed. Recommend funding for full amount".

By September, the shire was telling councillors it did not recommend the project because it would fund a specific club operation, auditors said.

Councillors did not fund it.

It was difficult to understand why assessors changed their recommendation as the council's practice at that point was to use overall comments for each application, not assessment criteria, auditors said.

"While it was reasonable for the council to decline the project, Loddon's records do not explain why the council's initial assessment was different to its final recommendation to the councillors," they said.

The council told auditors it had clear eligibility criteria for its community grants program, but acknowledged they could be strengthened in a review slated for 2022.

"All eligibility criteria will be reviewed to ensure they are still valid for each program," it said.

None of the councils audited consistently checked if recipients used funds as intended.

It meant they could not be sure grant recipients had used the funds as intended, met grant conditions or recovered any unspent funds.

Last August, a recreation reserve's management committee asked for a $35,000 grant it wanted to use to buy a new lawnmower.

The committee should have sold the old mower to supplement the grant under the program's policy.

It privately sold the old mower two months after buying the new one, "despite advising the council that the old mower had no trade-in value", the auditors found.

The $7700 sale proceeds were not returned to the council and the council did not check the funds had been spent as intended, auditors said.

"While the [committee] later informed Loddon about the sale, the council has no plans to recover this funding even though it should not have paid the full cost of the new mower," auditors said.

Loddon staff say they do have processes in place for competitive grants and are developing new processes for acquitting them.

Like other councils audited, Loddon should consistently monitor grant recipients as they use money, to detect potential fraud at an earlier stage, auditors said.

Mayor Dan Straub welcomed the chance to take part in the audit, according to a reply council sent to auditors over their findings.

He wrote that it was a chance to improve shire grant programs, "although I do raise concerns of some accuracy within the report, both from a contextual and factual perspective".

The council was rolling out a "SmartyGrants" program to help manage grants as auditors examined its grants programs, Cr Straub wrote.

He said SmartyGrants had become a useful tool to manage grants consistently, provide all documentation in a single portal and bring a consistent approach to assessment.

"We have continued, and will continue, to build on the capability of this program," Cr Straub said.

The council has told the Advertiser improvements made in recent years had not been reflected in the case studies the auditor general's office used in its report.

"The audit focused on grant processes over a five-year period, not solely on current practice," shire corporate director Amanda Wilson said.

The shire "partially agreed" conflict of interest processes could be improved, saying the council requires staff to declare conflicts of interest when writing reports, and that council meetings follow council governance rules.

"This is in addition to the general conflict of interest process that is in place for all other conflicts of interest that staff and Councillors must manage," they wrote.

The council is examining whether systems can be modified to help manage conflicts of interest. It will also review grant eligibility criteria and a fraud risk register.

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