Introduction
3.1
The Committee reviews the expenditure, including the annual financial statements, of the six Australian Intelligence Community (AIC) agencies pursuant to section 29 of the Intelligence Services Act 2001 (IS Act). All agencies, except ASIO, provided the Committee with a copy of their 2015‑16 financial statements. ASIO’s budget and financial statements are publically available in the Portfolio Budget Statements and the ASIO Annual Report 2015‑16.
3.2
The Committee reviewed the financial statements and took evidence from each agency during private hearings. The Australian National Audit Office (ANAO) also provided a submission to the inquiry, outlining its audit findings for each agency over the reporting period.
3.3
Much of the evidence received by the Committee is classified and has not been authorised for publication.
3.4
The Committee examined all material provided and questioned agencies on aspects of their expenditure. Following is an unclassified overview of the Committee's findings.
3.5
In examining the financial circumstances of each agency over the reporting period, the Committee sought evidence on each agency’s ability to meet its objectives within its budget parameters.
Budget and financial performance
3.6
The Committee requested agencies to provide an update on their expenditure for the reporting period, including the impact of any funding increases, any budget constraints, and the ongoing implications of the efficiency dividend.
ASIO
3.7
ASIO received an appropriation of $381 million in 2015–16, up from $368.4 million in 2014–15 and $346.2 million in 2013–14. ASIO’s capital budget was $32.1 million.
3.8
For the second year, ASIO’s 2015–16 revenue included additional funding relating to the ‘Enhance Security Intelligence Capabilities to Counter the Islamist Terrorism Threat’ measure that was announced by the Government in August 2014. This included $31.2 million in operating funding and an equity injection of $13.8 million for capital activities. ASIO expected to receive a further $97.3 million in operating funding and $27.6 million in capital funding under the measure over the next two financial years.
3.9
ASIO was also appropriated with $0.8 million under the ‘Syrian and Iraqi Humanitarian Crisis’ measure through the 2015–16 portfolio additional estimates process, and expected to receive an additional $0.6 million in 2016‑17.
3.10
ASIO noted, however, that it returned $55.6 million to the government through the efficiency dividend and other savings measures during 2015‑16.
3.11
ASIO reported that it had ‘actively managed’ its expenditure during the reporting period, including by streamlining business practices and reprioritising selected activities to release funds for emerging priorities. Despite these efforts, ASIO recorded an operating loss of $5.4 million in 2015–16, excluding depreciation. ASIO explained that:
ASIO’s financial position continued to be under pressure through the year due to the nature and number of investigations, the heightened security environment, and escalating business costs—including those associated with infrastructure, technologies and staff safety.
3.12
ASIO noted that its strategic allocation of resources had continued to focus on operational-related expenditure, which accounted for 81 per cent of its budget:
ASIO resources are deployed across hundreds of investigations and thousands of leads. ASIO collects intelligence through human intelligence, warranted activities, surveillance, and requests for protected data. ASIO delivers hundreds of thousands of security assessments and communicate[s] thousands of intelligence products and pieces of advice to enable action to be taken by our government, industry and international partners.
3.13
ASIO also provided the Committee with information on the organisational weighting towards counter-terrorism and counter-espionage and interference (CEI) within its operational-related expenditure.
3.14
In the 2017–18 Budget, the Government provided additional operating and capital funding to ‘support the operations’ of ASIO and ‘strengthen its capacity to meet the strategic priorities and objectives of the Organisation and the Government’. The amounts of additional funding were not published ‘due to national security reasons’. ASIO was also provided with an unpublished portion of a total $11.7 million in additional funding for the 2017–18 financial year shared with a range of other organisations providing services associated with the staging of the Gold Coast Commonwealth Games in April 2018.
ASIS
3.15
ASIS provided the Committee with a copy of its audited financial statements, together with an overview of its financial performance during 2015–16.
3.16
According to the 2016–17 portfolio budget statements, ASIS received $256.909 million in revenue from government in 2015–16 (including a departmental capital budget of $16.846 million), increased from $236.133 million in 2014–15. Together with an increase in own source revenue, total revenue increased by $28.0 million.
3.17
As noted in the Committee’s last administration and expenditure report, ASIS’s increased revenue in 2015–16 included:
$30.1 million in operating income and $5.8 million in related capital funding as part of the Government’s package for counter-terrorism announced in August 2014.
$6.5 million for ASIS’s work combatting people smuggling under ‘Operation Sovereign Borders’, as the final instalment of a three-year budget measure originally announced in late 2013.
$10.6 million in operational funding and $6.9 million in capital funding for ASIS to ‘strengthen capabilities’, including by ‘upgrading its ICT systems’, as part of a total $295.8 million measure announced in the 2015–16 Budget. The Committee received further financial information and an update on implementation of these initiatives at its private hearing and in supplementary submissions.
3.18
Offsetting funding increases, ASIS reported that the total impact of the efficiency dividend would be $7.9 million in 2016–17, and $9.1 million in 2017–18.
3.19
In the 2017–18 Budget, the Government provided additional operating and capital funding over four years to ‘support the operations’ of ASIS and ‘strengthen its capacity to meet the strategic priorities and objectives of the organisation and the Government’. The amounts of additional funding were not published ‘due to national security reasons’.
The efficiency dividend
3.20
Since its inquiry for the Review of Administration and Expenditure No. 7: Australian Intelligence Agencies, the Committee has monitored the impact of the efficiency dividend and other budget measures on the relevant agencies of the AIC through its annual reviews. The Committee’s ongoing concerns about the impact of the efficiency dividend on intelligence agencies have been reported to the Parliament as part of these reviews.
3.21
The efficiency dividend has been applied to the departmental budgets of Australian Public Service organisations since 1987. While the ‘usual’ annual savings rate under the efficiency dividend has been 1.00 or 1.25 per cent over this time, the rate has often been increased by governments in recent years—to as high as 4.00 per cent—in order to achieve greater savings. In 2014–15, a rate of 2.50 per cent was applied. This rate was maintained for 2015-16 and 2016–17, and as of the 2016–17 Budget it was expected to remain at 2.50 per cent for 2017–18, before dropping back to 2.00 per cent in 2018–19 and 1.50 per cent in 2019–20.
3.22
The Department of Defence is partially exempt from the efficiency dividend, with it only applying to approximately 11 per cent of its appropriations relating to ‘civilian and non-operational areas’ of the Department.
3.23
Since its 2008–09 review of administration and expenditure, the Committee has regularly raised concerns about the application of the efficiency dividend to intelligence agencies.
3.24
In its 2013–14 review, the Committee welcomed a substantial increase to the funding of AIC agencies to counter the terrorism threat and noted that this funding increase, if sustained, may mean that the ongoing efficiency dividend would be manageable. The Committee stated it would question ASIO and ASIS in future years on whether the new funding had offset or alleviated the ongoing impact of the efficiency dividend, or whether partial or full exemption would be required in order to effectively respond to security challenges.
3.25
The Committee also welcomed a Government decision, announced in the 2015–16 Budget, to exempt ONA (and the Office of the IGIS) from the ongoing application of the efficiency dividend.
3.26
ONA’s exemption from the efficiency dividend followed the January 2015 Review of Australia’s Counter-Terrorism Machinery by the Department of the Prime Minister and Cabinet (PM&C). Noting the particular difficulty of ONA and the Office of the IGIS to meet efficiency dividend requirements due to their small size, the review recommended the complete removal of the efficiency dividend from these organisations.
3.27
However, the PM&C review also recommended the removal of the efficiency dividend from the operational (i.e. non-administrative) activities of certain other organisations—specifically ASIO, ASIS, the Australian Federal Police (AFP), and (in-principle) operations of the former Australian Customs and Border Protection Service.
3.28
In its 2014–15 review, the Committee recommended that, in line with the recommendations of the PM&C review, the efficiency dividend be removed from all ASIO, ASIS and AFP operations. In doing so, the Committee reiterated its previous concerns and noted the high and increasing organisational security requirements of AIC agencies, which reduce their scope for cost-savings at a whole-of-organisation level without impacting operational capabilities.
3.29
In the current 2015–16 review, ASIO and ASIS continued to highlight the impact of the efficiency dividend and the constrained ability of their agencies to achieve savings without affecting operational capabilities. ASIS submitted:
ASIS has limited flexibility to produce efficiencies and reduce costs given that it must maintain secure facilities and technology, and it depends on long-term investments in partnerships, skills and capabilities. Unlike most other government agencies and departments, ASIS is unable to outsource the majority of its work.
3.30
The ongoing impact of the efficiency dividend was discussed in more detail with both agencies during private hearings. The Committee also discussed with ONA the impact on that office of being exempted from the efficiency dividend in 2015–16.
ONA
3.31
ONA’s departmental annual appropriation in 2015–16 was $30.273 million, up from $29.765 million in 2014–15. Additionally, ONA’s departmental capital budget was $3.928 million.
3.32
ONA had an operating loss of $0.314 million in 2015–16, excluding depreciation. ONA explained that this loss
relates solely to the impact of the decrease in the Government Bond Rate, resulting in an increase in employee benefits expense. Over the period 1 July 2015 to 30 June 2016, the Government Bond Rate decreased significantly from 3.01% to 1.98%. The Government Bond Rate is used to calculate the present value of employee leave provisions.
3.33
As noted previously, as part of the 2015-16 Budget, the Government announced that ONA (and the Office of the IGIS) would be relieved from ongoing efficiency dividends. The measure was expected to result in an additional $7.6 million being provided to ONA over four years, including $0.9 million in 2015–16.
3.34
During 2015–16, ONA also received $1.8 million in additional operating and related capital funding as part of the counter-terrorism package initially announced by the Government in August 2014.
3.35
In relation to procurement, ONA advised that it had published 77 contract notices to AusTender in 2015–16, with a combined value of $8.709 million. Of these, 78 per cent had a value of less than $80 000 and 85 per cent involved the provision of some form of service. Where whole-of government arrangements did not apply, ONA used ‘cooperative procurement practices’ wherever possible. ONA also reported that it uses the Department of Finance’s online Commonwealth Contracting Suite wherever possible to ‘facilitate compliant and streamlined procurement processes’.
3.36
In relation to travel, ONA submitted that its officials undertook 120 domestic and 108 international trips in 2015–16 (including visits to 37 countries) at a total cost of $1.304 million.
3.37
ONA advised that it had successfully transitioned to the Treasury payroll system in 2015–16 under the Shared and Common Services Programme.
DIAs
3.38
As part of their classified submissions, the DIAs each provided the Committee with copies of their financial statements. The statements were reviewed by the Committee during the inquiry.
3.39
The individual budgets and expenditure outcomes for the three DIAs are not publicly reported. However, according to the Defence Annual Report 2015–16, the total ‘departmental outputs’ related to the Department of Defence’s Intelligence Capabilities program—which included the three DIAs—was $609.764 million. Within this program, total funding for the three DIAs increased substantially between 2014–15 and 2015–16.
3.40
Funding for the operations of the DIAs was not subject to the efficiency dividend in 2015–16.
Committee comment
3.41
The Committee notes that, during the reporting period, agencies benefited from additional funding under a range of new funding measures. Counteracting these measures, ASIO and ASIS also continued to lose base funding to a 2.5 per cent efficiency dividend.
3.42
In its 2014–15 report, the Committee recommended the removal of the efficiency dividend from all ASIO, ASIS and AFP operations, noting the high and increasing organisational security requirements of AIC agencies and their reduced scope for cost-savings at a whole-of-organisation level. The Committee awaits the Government’s response to this recommendation.
3.43
However, the Committee notes that the efficiency dividend continued to be applied to ASIO and ASIS in the 2017–18 Budget. The Committee also notes that both organisations were provided with additional funding to support their operations and strengthen their capacity to meet strategic priorities. Although the amount of additional funding was not publicly disclosed, these measures are welcomed by the Committee. The measures may, in effect, offset some of the pressures on the base funding of agencies caused by the efficiency dividend. The Committee will continue to monitor the resourcing of both agencies through its future reviews.
Financial management
3.44
The Commonwealth’s financial framework is provided for under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
3.45
ASIS, ASIO and ONA are each required to produce annual financial statements in accordance with section 42 of the PGPA Act, as supported by the PGPA Financial Reporting Rule.
3.46
The ANAO conducts audits of these financial statements and reports on whether they comply with Australian Accounting Standards and the PGPA Financial Reporting Rule, and whether they present fairly the financial position of the entity and its financial performance and cash flows for the year. The ANAO conducts its audits in accordance with the ANAO’s Auditing Standards, which incorporate the Australian Auditing Standards, to ‘provide reasonable assurance as to whether the financial statements are free from material misstatement’. The ANAO explained:
Each audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entities’ preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entities’ internal control.
3.47
Under the provisions of section 105D of the PGPA Act, the Finance Minister has made determinations that allow for the Chief Executives of ASIO and ASIS to omit certain financial information from their financial statements where it could reasonably be expected to be operationally sensitive. The ASIS financial statements are ‘special purpose’ statements that are prepared in accordance with the PGPA Act and the Financial Reporting Rule. The ANAO noted that the section 105D determinations, as applied by ASIO and ASIS, impacted certain disclosures in the financial statements, but ‘do not impact the ability of the ANAO to audit the underlying transactions of the entities’.
3.48
The ANAO summarised key elements of the governance arrangements for ASIO, ASIS and ONA that are designed to provide ‘reasonable assurance’ in the preparation of financial statements as follows:
a number of management committees that meet regularly to evaluate the entity’s direction and financial results,
an internal audit function that provides assurance on the effectiveness of internal controls, and
an audit committee that meets quarterly and has independent members.
3.49
The DIA’s are not required under the PGPA Act to produce separate financial statements. As such, the revenues, expenses, assets and liabilities for the three organisations are included in the annual financial statements of the Department of Defence, which were audited by the ANAO. However, as noted above, in support of the Committee’s functions under section 29 of the IS Act, individual financial statements for each agency were provided to the Committee as part of its review.
ASIO
3.50
The ANAO assessed the risks of material misstatement associated with ASIO’s 2015–16 financial statements to be ‘moderate, recognising the special circumstances applying in relation to security and logistical arrangements’. The ANAO noted that the financial statements reporting requirements were not complex, with no administered schedules, special accounts or special appropriations. The ANAO also noted that
ASIO has an experienced and stable financial team that produces high quality financial statements and historically has been proactive in addressing any weakness in its accounting systems identified by the ANAO.
3.51
ASIO provided an overview of its internal financial controls in its submission. ASIO’s Chief Financial Officer (CFO) reports monthly to the ASIO Executive Board on financial performance matters and strategic financial management planning. The CFO also briefs ASIO’s Audit and Risk Committee on a quarterly basis. ASIO uses a financial management information system with integrated internal controls aligned to its financial framework, and ASIO’s internal audit section undertakes financial audits in addition to the ANAO’s audits.
3.52
The ANAO did not identify any audit issues for ASIO during the 2015–16 audit.
ASIS
3.53
In the context of the special purpose financial statements prepared by ASIS with regard to the determination applied under section 105D of the PGPA Act, the ANAO assessed the risks of material misstatement associated with ASIS’s 2014–15 financial statements to be ‘moderate, recognising the special circumstances applying in relation to security and logistical arrangements’. The ANAO noted that its assessment was primarily based on the size and nature of ASIS’s operations, established governance processes including an audit committee, no major audit issues identified in prior years and no significant changes in business operations.
3.54
ASIS provided an overview of its existing financial management arrangements and planned developments over the coming 12 months, including:
continuing to improve internal financial reporting processes,
upgrading and enhancing ASIS’s financial management information system focusing on travel and expense management functionality,
reviewing and updating all financial policies, as required,
enhancing support of covert operations,
supporting the development of affordability workforce planning initiatives,
continuing to focus on the delivery of financial management training across ASIS, and
3.55
ASIS noted that its ‘focus will remain on effective resource management and development of long-term financial strategies’ in order to ‘help ASIS remain sustainable and able to meet operational objectives’.
3.56
The submission provided details on ASIS’s financial monitoring and analysis arrangements, financial management information system, banking arrangements, devolved financial delegations, procurement processes, asset management policies, and financial policies.
3.57
The ANAO did not identify any audit issues for ASIS during the 2015–16 audit.
ONA
3.58
The ANAO assessed the risks of material misstatement associated with ONA’s 2015–16 financial statements as ‘moderate’. As noted in last year’s administration and expenditure report, one ‘Category C’ had been identified as part of the 2014–15 audit. Category C findings are those considered to be ‘minor’ and pose a low business or financial management risk to the entity. The ANAO reported that this finding had now been ‘closed’.
3.59
ONA provided an overview of its internal governance structures, audit program, risk management, and fraud prevention procedures as part of its submission.
3.60
ONA noted that, under the guidance of its Audit Risk Assurance Committee, and in line with the PGPA Act and latest Commonwealth risk management policy, a full review of ONA’s risk management policy and procedures was completed. ONA reported:
Modifications were made to components of our framework to more fully align it with better practice, make it more consistent with AS/NZS ISO 31000:2009 – Principles and Guidelines. We included a clearer definition of risk management roles for managers, centralised risk registers, and improved our policies and procedures to make the framework easier to understand and apply.
3.61
In addition to its annual internal audit program, ONA’s internal auditor completed the Compliance Report that is required annually by the Government’s Resource Management framework. The review assessed ONA’s internal controls established to ensure compliance with the PGPA Act, its rules and other legislation. ONA advised:
The review found ONA has a well-developed control structure consistent with the requirements of the relevant legislation and did not identify any breaches during the reporting period.
DIAs
3.62
As noted above, revenues, expenses, assets and liabilities of the three DIA’s are included in the annual financial statements of the Department of Defence, and not separately audited by the ANAO. In relation to the audit, the ANAO advised that ‘while individual items may be included in samples selected for testing, they are not separately identified’.
3.63
The Committee did not encounter any specific issues of concern in its own review of the financial statements for the three agencies.
Committee comment
3.64
The Committee has scrutinised each agency’s financial management, including its internal controls. On the basis of the evidence provided, the Committee was satisfied that agencies appropriately managed their expenditure in 2015–16.
Mr Andrew Hastie MP
Chair
June 2017