Strategic risk landscape for NSW local councils: 2026 and beyond

Local government in NSW operates at the intersection of community service delivery, infrastructure demand, digital transformation, and rising public expectations. In this environment, Internal Audit functions must move beyond retrospective reviews and play a proactive role in strengthening councils’ ability to identify, manage, and mitigate emerging risks with foresight, agility, and integrity.

Financial sustainability in an era of structural pressure

Financial sustainability remains one of the most persistent and complex challenges facing NSW local councils. Although improvements have been made in the timeliness and quality of financial reporting, these gains often obscure deeper structural pressures. Rising construction and operating costs, increased community expectations, and reliance on grants and developer contributions continue to strain long-term funding capacity.

Looking ahead, the core risk is less about short-term liquidity and more about adaptability. Economic volatility, shifting funding priorities, and cost escalation mean traditional financial metrics alone are no longer sufficient. Internal audit plays a critical role in shifting the focus toward forward-looking financial insight, including evaluating long-term financial planning, testing capital program assumptions, and assessing the use of scenario   analysis in decision-making.

Cyber security and technology risk as core business risk

The rapid digitisation of council operations has fundamentally reshaped the risk landscape. Technology is now central to service delivery, information management, and community engagement. Recent sector incidents demonstrate that cyber security failures can quickly lead to service disruption, financial loss, and reputational damage.

Importantly, risks extend beyond internal systems to cloud platforms, SaaS providers, and outsourced services. The key question is no longer whether incidents will occur, but how effectively councils are prepared to respond. Internal audit is increasingly focused on cyber governance, accountability, and resilience—ensuring executive ownership of cyber risk, robust incident response planning, and visibility over third-party security.

Fraud, integrity and public trust

Fraud and integrity risks continue to challenge the sector, particularly under heightened public scrutiny. Persistent control weaknesses are often observed in procurement, conflict-of-interest management, gifts and benefits, and information disclosure. While not always stemming from deliberate misconduct, failures in these areas can have significant financial and reputational consequences.

The forward-looking risk is the erosion of public trust. Internal audit can strengthen integrity frameworks by promoting transparency, embedding data analytics for fraud detection, and reinforcing ethical standards across all organisational levels. This supports a shift from reactive investigation to proactive prevention.

Governance, risk management and assurance maturity

Governance frameworks within NSW councils have evolved, supported by legislative reform and Audit, Risk and Improvement Committees. However, effectiveness varies widely. In some councils, governance is integrated into strategy and decision-making; in others, it remains compliance-driven and siloed.

As risks become more interconnected, governance structures must evolve accordingly. Internal audit can assess not just the design but the practical effectiveness of governance frameworks—examining risk escalation, information flow, and decision-making processes to strengthen overall assurance maturity.

Climate change, environmental resilience and asset risk

Climate change is increasingly shaping councils’ risk profiles. More frequent and severe events—such as flooding, bushfires, heatwaves, and coastal erosion—are placing sustained pressure on infrastructure, service continuity, and community safety.

Assets designed for historical conditions may no longer be fit for purpose, leading to accelerated deterioration and unplanned costs. The key risk lies in the disconnect between climate adaptation strategies and asset management practices. Internal audit can provide assurance that climate considerations are embedded in asset planning, capital investment, and business continuity frameworks.

Digital transformation and the governance of AI

Digital transformation is accelerating, with councils seeking efficiency and improved service delivery. The growing interest in artificial intelligence and automation introduces new opportunities alongside less understood risks. Many councils are still developing governance frameworks for responsible adoption.

Risks include poor data quality, algorithmic bias, and lack of transparency. Internal audit can play a proactive role by assessing digital governance structures early, helping establish guardrails that enable innovation while managing ethical and regulatory risks.

Workforce capability and organisational resilience

Workforce capability is a critical enabler of effective governance and risk management. Councils face ongoing challenges in attracting and retaining skilled professionals in areas such as cyber security, finance, and risk assurance. At the same time, workforce turnover can erode institutional knowledge and weaken control environments.

Workforce risk amplifies other risks. Internal audit can support resilience by reviewing succession planning, capability development, and reliance on key individuals, as well as evaluating shared service and co-sourcing models.

The evolving role of the chief audit executive

These emerging challenges highlight the evolving role of the Chief Audit Executive (CAE). Internal audit is no longer confined to retrospective assurance but is increasingly expected to provide forward-looking insight that informs strategic decision-making.

The most effective CAEs will combine independence with influence—leveraging evidence, insight, and professional judgement to help councils navigate uncertainty, strengthen governance, and maintain public trust.

For more information:

RSM is a full-service firm providing a diverse range of specialist solutions that cater to all aspects of the local government sector. To speak with an experienced business advisor or auditor, please contact Jeremy Elman directly or our specialist Local Government Services Team.