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 (IS Act). All agencies, except ASIO, provided a copy of their 2016–17 financial statements to the Committee. ASIO’s budget and financial statements are publically available in the Portfolio Budget Statements and ASIO’s Annual Report 2016–17.
3.2
The Committee reviewed the financial statements and took evidence from each agency during private hearings. The Committee also received a submission from the Australian National Audit Office, outlining its audit findings for each agency over the reporting period.
3.3
The Committee examine all material provided and questioned agencies on aspects of their expenditure.
3.4
Much of the evidence received by the Committee is classified and has not been authorised for publication. 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 address the following matters:
overall financial position of the agency,
the impact of any funding increases and budget measures,
the ongoing implications of the efficiency dividend (where applied) and other savings measures,
efficiencies and savings measures implemented within the organisation,
the status and key deliverables of significant capital expenditure projects, including any changes to budget, scope or timeframe, and
any significant changes in recurrent expenditure compared to previous years (both in total and in individual expenditure items), including the number and reasons for those changes.
ASIO
3.7
ASIO received an appropriation of $445.2 million in 2016–17, which comprised $403 million in operating funding and, for capital activities, $28.1 million in Departmental Capital Budget and $14.1 million in equity injection. ASIO’s appropriation in 2015–16 was $381 million.
3.8
For the third year, ASIO’s 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 $45.3 million in operating funding and an equity injection of $14.1 million for capital activities. ASIO advised that it expected to receive ongoing annual funding of $52 million in operating funding and $13.5 million in capital funding for this measure.
3.9
For the second year, ASIO received funding under the ‘Syrian and Iraq humanitarian crises’ measure. ASIO received $0.6 million in 2016–17, down from $0.8 million in 2015–16.
3.10
ASIO noted that it returned approximately $24.1 million to the government through the efficiency dividend and other savings measures during 2016‑17. It stated that Australian Government savings measures, including the efficiency dividend, will have a significant impact on ASIO’s ‘Departmental Capital Budget (DCB) and the 2017–18 operating budget, and across the forward estimates ($65.5 million)’.
3.11
ASIO also reported that it expected its DCB to ‘remain under particular pressure’ as it replaces capability assets, with increased capital expenditure in 2016–17 expected to continue over the forward estimates.
3.12
While ASIO stated that it would continue to ‘identify and implement efficiencies and rigorously prioritise’ activities, it indicated that
further consideration will be given during 2017–18 to the sustainability of our current operations in light of our projected DCB and operating budget, and our anticipated future operating environment.
3.13
ASIO recorded a surplus of $2.5 million (excluding depreciation) for 2016‑17.
3.14
ASIO noted that its strategic allocation of resources continued to be focussed on operational-related expenditure, which again accounted for 81 percent of its budget.
ASIS
3.15
ASIS provided the Committee with a copy of its audited financial statements, together with an overview of its financial performance during 2016–17.
3.16
According to the 2016–17 portfolio budget statements, ASIS received $276.158 million in revenue from Government in 2016–17 (including a departmental capital budget of $18.499 million), increased from $256.909 million in 2015–16, a total revenue increase of $20.776 million. ASIS noted that while additional appropriations were provided by government, its operating budget was affected by the impact of the efficiency dividend on base funding and reductions in specific operational funding.
3.17
As noted in the Committee’s previous report, the Government provided additional funding to ASIS over four years in the 2017–18 Budget. The amount of this funding is not published.
The efficiency dividend
3.18
The Committee has monitored the impact of the efficiency dividend and other budget measures on the AIC agencies in its annual reviews of administration and expenditure. 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.
3.19
The efficiency dividend has been applied to the departmental budgets of APS organisations since 1987. While the ‘usual’ annual savings rate under the efficiency dividend has been 1.00 or 1.25 percent over this time, the rate has been increased by governments—to as high as 4.00 percent—in order to achieve greater savings. In 2014–15, a rate of 2.50 percent was applied. This rate was maintained for 2015–16 and 2016‑17. The 2016–17 Budget stated that the efficiency dividend would remain at 2.50 percent for 2017–18, before dropping back to 2.00 percent in 2018–19 and 1.50 percent in 2019‑20. The 2018–19 Budget did not specify the rate at which efficiency dividend would be applied in 2018–19.
3.20
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.
3.21
In its 2013–14 review, the Committee welcomed a substantial increase to the funding of AIC agencies to counter the terrorism threat. The Committee noted that this funding increase, if sustained, may mean that the ongoing efficiency dividend would be manageable and 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.
3.22
The Committee welcomed the Government’s decision, announced in the 2015‑16 Budget, to exempt ONA (and the Office of the IGIS) from the ongoing application of the efficiency dividend. This exemption followed the January 2015 Review of Australia’s Counter-Terrorism Machinery by the Department of the Prime Minister and Cabinet (PM&C), which had recommended the complete removal of the efficiency dividend from these agencies.
3.23
The PM&C review had also recommended the removal of the efficiency dividend from the operational (i.e. non-administrative) activities of ASIO, ASIS, the Australian Federal Police (AFP), and (in-principle) operations of the former Australian Customs and Border Protection Service.
3.24
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.
3.25
In 2015–16, the Committee noted that while the efficiency dividend continued to be applied to ASIO and ASIS, both organisations had been provided with additional funding over the forward years which may, in effect, offset some of the pressures on base funding. The Committee indicated that it would continue to monitor agency resourcing in future reviews.
3.26
The Committee notes the views put forward by agencies for this review about the ongoing impact of the efficiency dividend.
ONA
3.27
ONA’s departmental appropriation in 2016–17 was $35.343 million, up from $30.273 million in 2015–16. This included a Departmental Capital Budget of $3.884 million.
3.28
ONA noted that its increase in operating expenditure was in line with increased revenue from Government. Most of the operating budget was expended on employees, with increased staff numbers in 2016–17 driving increased employee expenses.
3.29
ONA’s exemption from the efficiency dividend resulted in revenue from Government increasing by $1.681 million to $31.459 million in 2016–17. ONA noted that revaluation of its non-financial tangible assets as at 30 June 2017 resulted in an increase of $0.489 million in the holding value of these assets and an increase in the asset revaluation surplus.
3.30
Total capital expenditure for 2016–17 was $4.925 million with several major capital projects undertaken during the year.
3.31
ONA had an operating surplus of $0.063 million for 2016–17.
Defence Intelligence Agencies
3.32
As part of their classified submissions, the DIAs each provided copies of their financial statements.
3.33
The individual budgets and expenditure outcomes for the DIAs are not publicly reported. The Defence Annual Report 2016–17 states that the total ‘departmental outputs’ for the Strategic Policy and Intelligence program was $973.489 million. The Committee notes changes to the total funding for the DIAs between 2015–16 and 2016–17.
3.34
Funding for the operations of the DIAs was not subject to the efficiency dividend in 2016–17.
Committee comment
3.35
In its 2015–16 report, the Committee noted the ongoing application of the efficiency dividend to ASIO and ASIS, as well as additional funding provided to both agencies to support their operations and strengthen their capacity to meet strategic priorities. The Committee commented that these funding measures may, in effect, offset some of the pressures on the base funding of agencies caused by the efficiency dividend.
3.36
In 2016–17, agencies continued to comment on the impact that the efficiency dividend is having upon agency activities. The Committee took the opportunity in its private hearing with ASIO to explore in particular the impact of the efficiency dividend on ASIO’s Departmental Capital Budget. The Committee notes too that, as ONA transitions to the new Office of National Intelligence (ONI), the efficiency dividend will be applied to ONI funding from 2019–20 and to the whole of ONA funding from 2020–21.
3.37
As has been the case for some years now, the Committee will continue to monitor the resourcing of agencies and the impact of the efficiency dividend on their base funding.
Financial management
3.38
The Commonwealth’s financial framework is provided for under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
3.39
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 2015.
3.40
The Australian National Audit Office (ANAO) audits these financial statements and reports on whether the financial statements:
comply with the Australian Accounting Standards–Reduced Disclosure Requirements and the PGPA Financial Reporting Rule, and
present fairly the financial position of the entity and its financial performance and cash flows for the year then ended.
3.41
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.
3.42
Under the provisions of section 105D of the PGPA Act, the Finance Minister has made determinations that allows 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. ASIS’s financial statements are ‘special purpose’ statements that are prepared in accordance with the PGPA Act and the Financial Reporting Rule.
3.43
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’.
3.44
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.
3.45
The DIA’s are not listed as prescribed entities in the Regulations and are therefore not required to produce separate financial statements under the PGPA Act. Instead, the revenues, expenses, assets and liabilities of these agencies are included in the annual financial statements of the Department of Defence. Individual financial statements for each agency were provided to the Committee, however, as part of this review.
ASIS
3.46
The ANAO assessed the risks of material misstatement associated with ASIS’s 2016–17 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 issues noted in prior years, and no significant changes in business operations.
3.47
The ANAO identified one low risk audit issue related to human resources management processes for ASIS in 2016–17.
ASIO
3.48
The ANAO assessed the risks of material misstatement associated with ASIO’s financial statements as ‘moderate, recognising the special circumstances applying in relation to security and logistical arrangements’. The ANAO noted that its assessment was primarily based on the financial statements reporting requirements which ‘are not complex; there are no administered schedules, special accounts or special appropriations’. Further, ‘ASIO has an experienced and stable finance team that produces high quality financial statements and historically has been proactive in addressing any weaknesses in its accounting systems identified by the ANAO’.
3.49
The ANAO identified one low risk audit issue related to human resources management processes for ASIO in 2016–17.
ONA
3.50
The ANAO assessed the risks of material misstatement associated with ONA’s financial statements as ‘moderate’. The ANAO did not identify any audit issues for ONA during 2016–17.
Defence Intelligence Agencies
3.51
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’.
Committee comment
3.52
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 2016–17.
Concluding comments
3.53
While this review relates to the 2016–17 financial year, the Committee recognises that the intelligence community is currently undergoing a period of significant change arising from the 2017 Independent Intelligence Review and the machinery of government changes following the creation of the Department of Home Affairs. These changes impact agencies across the Australian Intelligence Community as it expands into the National Intelligence Community.
3.54
The changes will also affect the role of this Committee and that of the Inspector-General of Intelligence and Security.
3.55
The Committee took the opportunity during its private hearings to discuss some of the implications of these changes with the Inspector-General of Intelligence and Security and affected agencies. In general, agencies noted they were committed to supporting the whole-of-government reforms. The Committee will examine the ongoing effect of these changes on the administration of the intelligence community, beginning with its next review of the 2017–18 year and continuing in future reviews. The Committee anticipates that these reviews will also examine the outcomes of the comprehensive review of the legal framework governing the national intelligence community, being undertaken by Mr Dennis Richardson AO.
3.56
The Committee considers it is essential that, as the National Intelligence Community is established, a high and effective level of oversight is maintained. The Committee welcomes the increased funding for the office of the Inspector-General of Intelligence and Security. The Inspector-General has a key role in providing public assurance that each intelligence agency acts legally and with propriety, complies with ministerial guidelines and directives, and acts consistently with human rights.
3.57
Noting the legislative and machinery of government reforms that have already occurred or are presently before the Parliament, the Committee considers commensurate oversight must be established as soon as possible. Legislative amendments to expand the IGIS’s remit and other oversight mechanisms should be brought forward without delay.
Andrew Hastie MP
Chair