3.1
The Committee reviews the expenditure, including the annual financial statements, of the six National Intelligence Community (NIC) agencies pursuant to section 29 of the Intelligence Services Act 2001 (IS Act).
3.2
ASIO, ASIS, ASD’s and ONI’s (since 2019-20, as ONA for 2018-19) budget statements are available publically as part of the relevant Portfolio Budget Statements published every year at Budget time.
3.3
ASIO’s annual report has traditionally been the only public reporting of financial statements of relevant agencies, however with ASD’s creation as a statutory authority, for the reporting periods relevant to this report its financial statements have also been publically available as part of its Annual Reports.
3.4
All agencies provided a copy of their 2018-19 and 2019-20 financial statements to the Committee, either directly in classified submissions or by reference to the publically available statements in Annual Reports. All agencies also outlined potential financial impacts or irregularities related to the onset of COVID-19 in the last half of the 2019-20 reporting period.
3.5
The Committee reviewed the financial statements and took evidence from any agency that it wanted to investigate points with during classified hearings. The Committee also received a submission from the Australian National Audit Office (ANAO) for each reporting period, outlining its audit findings for each agency over the reporting period.
3.6
The Committee examined all material provided and questioned agencies on aspects of their expenditure.
3.7
Much of the evidence received by the Committee is classified and has not been authorised for publication. The following commentary is an unclassified summary of the Committee’s areas of investigation.
3.8
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.
3.9
In previous reports the Committee has often summarised the financial statement information of agencies that is publically available. In line with the intention stated in the Administration Chapter of this report, and the future direction that the Committee intends to take (expanded on in Chapter 4), the Committee will only be emphasising below points of interest or summaries of information not already publically available.
Budget and financial performance
3.10
The Committee requested agencies to make submissions addressing 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 the budget, scope or timeframe for each project; and
any significant changes in recurrent expenditure compared to previous years (both in total and in individual expenditure items), including the nature of and reasons for those changes.
ASIO
3.11
ASIO provided detail to the Committee in its submissions regarding its budget, allocation of resources, capital expenditure, cost of consultants, financial controls, internal audit and assurance functions, savings measures and general information regarding constraints or challenges to meeting operational capability requirements.
3.12
The Committee noted with interest the ongoing allocation of funds to measures to bolster responses to identified or emerging national security threats. Whilst the Committee cannot comment on the detail of these measures due to their classified nature, the complementary nature of the work of these measures to issues brought before the Committee, either in briefings or in relation to associated legislation that the Committee has reviewed or oversights, is welcome information to assure the Committee that the responses to identified threats are appropriate and well targeted.
3.13
In general, other than necessarily classified reporting of expenditure related to capabilities, ASIO has the most public scrutiny of its expenditure and financial management of any of the agencies under review by the Committee.
3.14
The Committee received relevant information from ASIO regarding the impacts of the evolving threat environment and the role that the digital landscape impacts on its capability to adapt to those threats. As outlined in Chapter 1, this evolving digital landscape has instigated the majority of national security legislation brought before this Committee in the last three Parliaments and the Committee received classified evidence from ASIO regarding the way that these threats are being addressed within budgetary parameters, including the impact of the efficiency dividend.
ASIS
3.15
ASIS provided the Committee with a copy of its audited financial statements, together with overviews of its financial performance during for both reporting periods – 2018-19 and 2019-20.
3.16
Due to the covert nature of ASIS’s work and the requirement for classification of financial information regarding the agency, the Committee cannot comment extensively on the information provided in submissions.
3.17
However, the Committee noted that ASIS provided comprehensive information regarding the impact of COVID-19 on the agency’s expenditure, mainly in the areas of travel, learning and development, recruitment and operational expenditure – both where costs reduced, but also where spending increased.
3.18
ASIS provided further information to the Committee on some aspects of the operations or logistics that contributed to these increases and decreases in a classified hearing.
ONI
3.19
ONI reported an increase in total annual appropriations between 2018-19 and 2019-20 of $59.352 million and $77.723 million respectively. This increase reflects the increased role that ONI is taking with its revised mandate within the NIC.
3.20
In line with previous reporting periods, the majority of ONI’s operating budget was spent on employees, with the indicated increase in expenditure commensurate with the staffing increases reflected in Chapter 2 of this report.
3.21
ONI indicated in its submission that it is not subject to the efficiency dividend, despite plans for it to apply from 2019-20, as reported in the Committee’s Review No. 17 report.
ASD
3.22
ASD’s first two financial years of public reporting of financial and expenditure information coincides with the reporting periods for this report. However, some information provided in the earlier reporting period’s classified submission attracts national security classification markings, so the points outlined below are necessarily brief to ensure no inadvertent release of historically classified material. Public financial statements and budget information is available for ASD, as identified earlier in this Chapter.
3.23
ASD provided financial summaries to the Committee which identify overall revenue for the two periods as relatively stable, with expenses remaining equally stable, comprised almost entirely of supplier and employee related expenses.
3.24
Fluctuating efficiency dividend application to ASD was commented on, with information provided to the Committee regarding additional funding provided to ASD for specific specialist assistance provided to Government. Overall ASD reported that adequate funding was provided for its operations across the reporting periods, with only minor asset value impacts regarding transfer from Defence to ASD upon its separation and creation as a separate statutory agency.
AGO and DIO
3.25
As part of their classified submissions, AGO and DIO each provided copies of their financial statements.
3.26
The individual budgets and expenditure outcomes for the AGO and DIO are not publicly reported. Review reports in the past have highlighted the reported Defence Department Annual Report figures against ‘departmental outputs’ related to the Strategic Policy and Intelligence program (2.1). This is not an accurate reflection of the costs associated with the operation of AGO and DIO as reported to the Committee in submissions, however for consistency the reported outputs for 2018-19 and 2019-20 were $652.667 million and $882.887 million respectively. This contrasts quite dramatically against the 2017-18 figure of $1,163.001 million.
Committee comment
3.27
The Committee thanks the agencies under review for providing financial summaries and statements as part of their submissions. Whilst the Committee is not able to report on specifics of expenditure areas of interest , the Committee noted with interest some variations in expenditure reports, such as:
Increases in legal supplier costs;
Unexpected surpluses and revenue gains;
Increased rigour around tracking of portable items;
Reporting of assets under completion and depreciation expenses; and
General variations related to COVID-19 impacts (covered more in Chapter 4).
3.28
Overall the Committee is satisfied that the agencies are managing budgets and expenditure appropriately.
Financial statement audits
3.29
The Commonwealth’s financial framework is provided for under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
3.30
ASIS, ASIO, ASD and ONI are each required to produce annual financial statements in accordance with section 42 of the PGPA Act, as supported by the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the Financial Reporting Rule).
3.31
The ANAO audits these financial statements and reports on whether the financial statements:
comply with the Australian Accounting Standards and the Financial Reporting Rule; and
present fairly the financial position of the entity and its financial performance and cash flows for the year then ended.
3.32
The ANAO conducts its audits in accordance with the ANAO’s Auditing Standards, which incorporate the Australian Auditing Standards, so as 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.
3.33
Under section 105D of the PGPA Act, the Finance Minister has made determinations that allow the Accountable Authorities of ASD, ASIO and ASIS to omit certain financial information from their financial statements where it could reasonably be expected to be operationally sensitive. Due to the pervasiveness of the use of this determination, ASIS’s financial statements are ‘special purpose statements’ that are prepared in accordance with the PGPA Act and the Financial Reporting Rule. The ANAO continued to report that despite the application of the determination, its ability to undertake the audits required and access the relevant information is not impacted.
3.34
The ANAO reported that key elements of the governance arrangements for all applicable agencies across both reporting periods that are designed to provide ‘reasonable assurance’ in the preparation of financial statements continued to operate 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.
3.35
AGO and DIO were not listed as prescribed entities in the PGPA Act Regulations for the reporting periods, and were therefore not required to produce separate financial statements under the PGPA Act. Instead, the revenues, expenses, assets and liabilities of these agencies were included in the annual financial statements of the Department of Defence. Unaudited financial statements for both AGO and DIO were provided to the Committee as part of both reviews.
3.36
Below are short summaries of the information provided to the Committee from the ANAO regarding audits of each agency over both reporting periods, noting that for ANAO’s 2019-20 submission, the Auditor-General commenced identifying audit risk ratings to areas of audit focus.
ASIS
3.37
The ANAO assessed the risks of material misstatement associated with ASIS’s financial statements from both 2019-19 and 2019-20 to be ‘moderate’.
3.38
The ANAO issued an unmodified audit report for 2018-19 for ASIS, but did identify one ‘moderate’ risk audit issue related to non-financial assets in the course of its 2019–20 audit, though it didn’t preclude the issuing of an unmodified audit report for that period.
ASIO
3.39
The ANAO assessed the risks of material misstatement associated with ASIO’s financial statements for both reporting periods as ‘moderate’.
3.40
The ANAO issued an unmodified audit report for 2018-19 for ASIO, but did identify three ‘moderate’ risk audit issues for the 2019-20 period related to employee benefits, non-financial assets and right of use assets associates with lease contracts, none of which precluded the issuing of an unmodified audit report for that period.
ONI
3.41
For both reporting periods, the ANAO assessed the risks of material misstatement associated with ONI’s financial statements as ‘low’. One area of audit focus for both periods concentrated on employee benefits, but attracted a low risk rating and unmodified audit reports were issued for both periods.
ASD
3.42
The ANAO assessed the risks of material misstatement associated with ASD’s financial statements for both reporting periods as ‘moderate’.
3.43
The ANAO issued an unmodified audit report for 2018-19 for ASD, noting a number of minor issues and areas of focus related to the evolving nature of shared services, measurement and recognition of non-financial assets, and accounting for the machinery of government changes related to the creation of ASD as a separate entity. The ANAO issued an unmodified audit report for ASD for 2018-19.
3.44
ANAO identified three ‘moderate’ risk audit issues for the 2019-20 period related to measurements and recognition of non-financial assets, transactions made by shared service partners, and right of use assets associates with lease contracts, none of which precluded the issuing of an unmodified audit report for that period.
3.45
The issue from 2019-20 related to measurement and recognition of non-financial assets was upgraded for the period and related to the asset management and accounting framework relating to assets under construction and transfer of completed constructions to the agency’s asset register. The ANAO identified improvements and additional training as controls for meeting financial management responsibilities, which ASD have undertaken to address during 2020-21.
AGO and DIO
3.46
As noted above, revenues, expenses, assets and liabilities of the AGO and DIO were included in the annual financial statements of the Department of Defence for the reporting periods, and not separately audited by the ANAO.
3.47
In relation to the audit, the ANAO advised that for both periods ‘Whilst the ANAO identified audit findings in the financial statement audit of Defence and reported them to the Accountable Authority, none were specifically related to the operations or financial management of DIO and AGO’.
Committee comment
3.48
On the basis of the evidence from the Auditor-General, the Committee is satisfied that the agencies are appropriately reporting their financial position through their financial statements. The Committee notes that no significant or moderate audit issues were identified by the ANAO during either 2018-19 or 2019-20 in relation to the agencies.