Chapter overview
2.1
As outlined in Chapter 1, the Committee’s review of the Auditor-General Act 1997 (the AG Act) highlighted areas where the role and remit of the Auditor-General and the Australian National Audit Office (ANAO) could be clarified and ambiguities resolved. In doing so, the Committee believes these changes will further strengthen the independence of the Auditor-General. These areas include:
Clarifying the designation ‘independent officer of the parliament’, including the implied functions, powers, rights, immunities and obligations arising from the Auditor-General fulfilling this role; and
Clarifying the ANAO’s mandate, including in relation to performance statement auditing, auditing of Government Business Enterprises and some technical issues.
The role and independence of Supreme Audit Institutions
2.2
Supreme Audit Institutions (SAIs) have a significant role in public accountability. The ANAO is Australia’s SAI, and works under the framework of the AG Act and the Public Accounts and Audit Committee Act 1951 (PAAC Act). Further, SAIs around the world are evolving. New global standards in what constitutes best practice are emerging.
2.3
The International Organization of Supreme Audit Institutions (INTOSAI) is an ‘umbrella organization for the external government audit community’. INTOSAI is a non-governmental organisation (NGO) with special consultative status with the Economic and Social Council of the United Nations. Australia is a full member of INTOSAI.
2.4
One of the focus areas of INTOSAI is improving the independence of SAIs around the world. This focus is best described in the 2007 Mexico Declaration on SAI independence, as outlined in chapter 1. The Mexico Declaration sets out eight core principles for members to work towards.
2.5
The ANAO explained Australia’s commitment to the Mexico Declaration:
The United Nations General Assembly have encouraged United Nations member states to apply the Mexico Declaration in a manner consistent with their national institutional structures through both Resolution 66/209 of 22 December 2011 and 69/228 of 19 December 2014. These resolutions were passed by consensus and no objections by the Australian Government. Given the recognition of the Mexico Declaration by the United Nations General Assembly and its member states, including Australia, the ANAO consider that comparison against the Mexico Declaration is the best method of assessing the independence of the Auditor-General of Australia.
2.6
Chartered Accountants Australia New Zealand argued that alignment with the Mexico Declaration was important to the ensure the independence of the ANAO:
This inquiry into the Act provides a good opportunity to assess the current provisions of the Act relating to the Auditor-General’s independence against the eight core principles of independence declared by the International Organization of Supreme Audit Institutions. Alignment with these core principles is essential to strengthen the Auditor-General’s current independence requirements and to ensure public sector auditing continues to be highly effective especially as the challenges and uncertainties the present-day pose.
2.7
In 2020 the Australasian Council of Auditors General (ACAG) issued a report, Independence of Auditors General. This was as an update of a survey of Australian and New Zealand legislation relating to SAIs, which benchmarked progress of different jurisdictions against the principles of the Mexico Declaration.
2.8
The survey found that the Australian Capital Territory (ACT) has the highest overall independence score, followed by New Zealand and Victoria. The ANAO highlighted that for the overall independence score the Commonwealth placed ‘7th in Australia and New Zealand, which is a decrease from 6th in 2013, which was a further decrease from 5th in 2009’.
2.9
The ANAO explained this drop was not because of ‘tangible examples of a weakening in the overall independence framework supporting the Auditor-General of Australia’ rather ‘Australia’s ranking has been impacted by improvements in other jurisdictions’.
2.10
The AG Act outlines the independence of the Auditor-General and the ANAO, including:
Subject to this Act and to other laws of the Commonwealth, the Auditor‑General has complete discretion in the performance or exercise of his or her functions or powers. In particular, the Auditor‑General is not subject to direction from anyone in relation to:
(a) whether or not a particular audit is to be conducted; or
(b) the way in which a particular audit is to be conducted; or
(c) the priority to be given to any particular matter.
2.11
Similarly, the Joint Committee of Public Accounts and Audit’s (JCPAA, the Committee) establishing legislation, the Public Accounts and Audit Committee Act 1951, outlines the Committee’s duties including in relation to the Auditor-General but also notes: ‘Nothing in subsection (1) authorises the Committee to direct the activities of the Auditor‑General or the Independent Auditor’.
Independent Officer of the Parliament and the need for the ANAO to become a Parliamentary Department
2.12
Section 8 of the AG Act establishes the Auditor-General as an ‘independent officer of the parliament’:
(1) The Auditor‑General is an independent officer of the Parliament.
(2) The functions, powers, rights, immunities and obligations of the Auditor‑General are as specified in this Act and other laws of the Commonwealth. There are no implied functions, powers, rights, immunities or obligations arising from the Auditor‑General being an independent officer of the Parliament.
2.13
The ANAO noted that this concept, created in the AG Act, ‘was not well established and was largely symbolic’.
2.14
The Parliamentary Secretary to the Treasurer at the time, former Senator Ian Campbell, explained the intentions of the Act:
[T]he bill declares the Auditor-General to be an ‘independent officer of the parliament’ as an expression of the primary and unique relationship which the office has with the Parliament.
2.15
The then-Chair of the JCPAA, the Hon Mr Alexander Somlyay MP, further outlined that ‘the title… encapsulates the role and status of the office of the Auditor-General’.
2.16
However, the Opposition stated:
[T]hat this change is cosmetic and meaningless. Indeed, the following provision in the bill, subclause 8(2) specifically states ‘… There are no implied functions, powers, rights, immunities or obligations arising from the Auditor-General being an independent officer of the Parliament’.
2.17
The Auditor-General recommended that the JCPAA consider, as part of this inquiry:
[W]hether the governance frameworks of the ANAO (could) be amended to better support ANAO independence and recognise the role of the Auditor-General as an independent officer of the Parliament such as by making the ANAO a Parliamentary department.
2.18
The ANAO outlined Principle 1 of the Mexico Declaration recognises that the Auditor-General and ANAO should operate within an effective legal framework… that spells out, in detail, the extent of independence:
SAIs are free from direction or interference from the Legislature or the Executive in the
• selection of audit issues;
• planning, programming, conduct, reporting, and follow-up of their audits;
• organization and management of their office …
SAIs should ensure that their personnel do not develop too close a relationship with the entities they audit, so they remain objective and appear objective.
2.19
The ANAO and numerous witnesses raised concerns about the Auditor-General’s current status within the Department of Prime Minister and Cabinet (PM&C) and its impact on perceived or real independence and argued that becoming a parliamentary department would address this challenge:
While the independence benefits of being a Parliamentary Department largely relate to the appearance of independence, this is an important consideration as independence comprises both independence of mind and independence in appearance. Further, this option better aligns the governance framework of the ANAO with principle 8 of the Mexico Declaration, which requires managerial and administrative autonomy for the SAI. Under this model, ANAO staff would not clearly be members of the executive government. The ANAO has not identified any major practical issues with becoming a Parliamentary Department.
2.20
The Australasian Council of Auditors General highlighted that the ANAO’s current status within the Executive branch of government may result in risks to the ANAO’s independence:
When considering the governance frameworks of the ANAO, the objective should be to set up the ANAO’s framework in a manner that best supports its independence and recognises the role of the Auditor General as an independent officer of the Parliament.
The ANAO currently forms part of the Executive government, which means that it is subject to the policies and processes of Executive government which it is also required to audit.
2.21
However, the Auditor-General stated that ‘…there are no examples that we could give of things that have occurred which should be prevented by us becoming a parliamentary department’.
2.22
The ANAO further outlined that there were no identifiable instances where they had been directed by Executive Government:
CHAIR: Have you ever had an instance where you've been directed by the Department of the Prime Minister and Cabinet with respect to your work?
Mr Hehir: Not with respect to Auditor-General functions, no.
2.23
The Deputy Auditor-General outlined the incongruous nature of the current framework stating that ‘At the moment we sit within executive government, yet we serve the parliament’.
2.24
Another key issue is that even if the ANAO became a parliamentary department, ANAO staff, who are currently employed under the Public Service Act 1999 and are therefore subject to the direction of the Australian Public Service Commissioner, could still be subject to direction:
CHAIR: Are you saying that, were you to be a department of the parliament, staff employed as officers or staff of the department cannot be directed?
Ms Mellor: The Public Service Commissioner is the Parliamentary Service Commissioner, so the risk is still there but the ministerial connection is lower. The ministers would likely be the presiding officers rather than a minister of the Crown in the executive government sense.
Committee comment
2.25
The Committee appreciates the perspective that a realignment of the ANAO to become a parliamentary department could reinforce the designation of the Auditor-General as an independent officer of the parliament.
2.26
The Committee notes that the ANAO has advised there have been no instances where they have been directed by the PM&C with respect to Auditor-General functions. The Committee also acknowledges that while a concern was expressed about the potential for direction of ANAO staff, the change to become a parliamentary department would not entirely address this issue.
2.27
The Committee’s view is that defining the term ‘independent officer of the parliament’ will assist with clarifying some of the perceptions and inherent challenges outlined by the ANAO. This is a more foundational change, which would require amendments to the Auditor-General Act 1997, to more fully outline the extent and nature of independence of the ANAO.
2.28
By first clarifying in relevant legislation the definition and remit of the Auditor-General as an ‘independent officer of the parliament’, the Committee also sees merit in the ANAO becoming a department of the Parliament. This will enhance and more appropriately define the legal framework within which both the ANAO and the Auditor-General sit.
2.29
The Committee’s view is that the governance frameworks of the ANAO could be strengthened by amending section 8(2) of the AG Act. Rather than expressly ruling out any ‘implied functions, powers, rights, immunities or obligations arising from the Auditor‑General being an independent officer of the Parliament’, the Committee recommends that Government consider clearly outlining each of these aspects and what impact this role has on the Auditor-General’s powers and functions.
2.30
The Committee recommends that section 8 of the Auditor-General Act 1997 be amended to define the term ‘independent officer of the Parliament’, and that consideration be given to clearly outlining the implied functions, powers, rights, immunities and obligations arising from this designation of the Auditor-General.
2.31
The Committee recommends that the Australian Government consider amendments to administrative arrangements to establish the Australian National Audit Office as a parliamentary department.
History of the ANAO within the Executive
2.32
The PM&C reflected on the different government portfolios the ANAO has sat in over the past century:
…compared to many other functions of government, the functions that belong to the Auditor-General have been relatively stable over a very long period of time. The fact that it's moved from the Treasury portfolio to the Finance portfolio to the Prime Minister's portfolio in 120 years doesn't suggest that it's been moved around very often; it hasn't. It's had a fairly stable existence within the machinery of government and all of that period has been within the executive. But as I said earlier, it is technically possible, I believe, to transfer an agency from the executive to the parliament; that can be done.
2.33
The PM&C highlighted that, while the ANAO falls within the PM&C portfolio, this is a purely administrative connection:
As the committee is aware, the ANAO operates independently from the executive arm of government. Section 8 of the Auditor-General Act 1997 establishes the Auditor-General as an independent officer of the parliament, and that officer has complete discretion in the performance or exercise of their functions or powers. As a portfolio agency in the PM&C portfolio, the ANAO is situated for administrative purposes only. It's a similar arrangement to that that we have in place for the Office of the Official Secretary to the Governor-General. In practical terms, it means that both of these agencies operate on a day-to-day basis without any ministerial oversight or direction. Compared with other portfolio agencies, including the Office of the Official Secretary to the Governor-General, the Department of the Prime Minister and Cabinet has significantly less involvement with the ANAO and its matters.
2.34
PM&C described their relationship with the ANAO as ‘facilitative’ rather than providing any oversight of the ANAO: ‘In the case of the Audit Office, the independence is considerably more than most agencies’.
2.35
Auditor-General Mr Grant Hehir argued that if the ANAO were being set up now it would be as a parliamentary department, similar to how the Parliamentary Budget Office was established in 2012:
… if you were setting up the Audit Office now, how would you do it? My view is that you would set it up in the way the Parliamentary Budget Office was established. Therefore, if there were going to be amendments to the act, why wouldn't you move it into that framework, which is the more contemporary framework for how these things operate? But it is largely about perception; it's not about day-to-day practical problems.
Appointment of the Auditor-General
2.36
Currently, the Auditor-General is appointed by the Governor-General, on recommendation of the Minister (the Prime Minister). The Minister can only make that recommendation once the appointment has been referred to, and approved by, the JCPAA.
2.37
ACAG commented on how other jurisdictions were improving independence by moving away from the Auditor-General being appointed by the Executive:
By way of comparison, the ACT’s Auditor-General Act 1996 was amended in recent years to make the Auditor-General an officer of the Assembly with appointment and termination a matter for the Legislative Assembly. Prior to that the Auditor-General was appointed on the recommendation of the executive government.
2.38
In New South Wales, like the Commonwealth, the recommendation for appointment is made by the Executive, but with capacity for the parliament (or one of its committees) to veto that choice. The Australian Capital Territory (ACT), Northern Territory, Victoria and New Zealand have Auditors-General appointed on recommendation by either the relevant State Parliament or Legislative Assembly, or a parliamentary committee. Queensland, Western Australia (WA) and Tasmania have appointments made by the Executive, after consultation with the parliament. In South Australia (SA), the appointment is made by the Executive with no mandated consultation with the SA Parliament.
2.39
One point of comparison is the Parliamentary Budget Officer. The Parliamentary Budget Officer is appointed by the Presiding Officers, for a fixed term (four years). The Presiding Officers must obtain the approval of the JCPAA before making the appointment. Once the Presiding Officers have referred a proposed appointment to the JCPAA, the JCPAA must either approve or reject the proposal within 14 days, or request more time to consider it (a lack of response from the Committee is considered an approval).
2.40
Generally, the JCPAA receives information from the Presiding Officers about their proposed appointment and meets with the proposed appointee before making their recommendation to the Presiding Officers about the Parliamentary Budget Officer.
2.41
The Committee notes there are significant differences between the role of the Auditor-General and the Parliamentary Budget Officer. The Auditor-General is appointed for a term of ten (10) years and may not be reappointed. The Parliamentary Budget Officer is appointed for a period of four (4) years and may be reappointed for a total of no more than eight (8) years.
2.42
There are more substantive differences, including that the Auditor-General’s responsibility is to the Parliament as a whole, whereas the Parliamentary Budget Officer primarily provides information and analysis to individual members of the parliament. The Auditor-General also has extensive interactions with public sector entities (through the ANAO’s auditing), as opposed to the PBO’s relatively parliamentary-focused external relationships.
2.43
While these functions and appointment terms are significantly different, the role of the JCPAA, as per the respective legislation, is to accept or reject the proposed appointment. This role is an important function of the JCPAA, as the Committee is comprised of Members and Senators from across the Parliament, including the Government, Opposition and Crossbench.
Committee comment
2.44
The JCPAA has an important role in the appointment of both the Auditor-General and the Parliamentary Budget Officer, acting as the voice of the Parliament. Even if the administrative arrangements of the ANAO are amended (i.e. becoming a parliamentary department) the Committee’s role in the appointment of the Auditor-General should not change.
2.45
One option could include the Prime Minister maintaining the role of selecting a nominee, but instead of requiring majority approval by the JCPAA, changes could be implemented so the nominee requires unanimous approval by all members of the Committee or a super-majority sufficient to demonstrate the confidence of the Opposition. This would help to strengthen the real and perceived independence of the role, given the candidate would be required to have cross-party support.
2.46
The Committee recommends that the Australian Government consider ways to amend the Auditor-General Act 1997 to expand the role of the Joint Committee of Public Accounts and Audit (JCPAA) as the relevant Parliamentary Committee in the appointment process for the Auditor-General. This could include requiring approval by the JCPAA of the Prime Minister’s nominee by unanimous approval or a super-majority.
Assessing the merits of government policy
It is usual, and appropriate, for any matters relating to Government policy to be outside a SAI’s functional mandate. This matter is most relevant to SAI’s performance audit function that often examines an organisation’s non-financial performance.
2.48
The Auditor-General highlighted that the ANAO’s role is not about assessing the relative merits of policy approaches but assessing the administration and implementation of the government’s policy:
It's usual practice that audit officers go into undertaking assessment of the administration of policy and don't comment on the merits of policy. We don't see our role as doing a review of the implementation of a government policy and saying that the policy is wrong; we talk about whether its implementation is having the impact that it's meant to have. The nature of our work really doesn't go to whether one policy is better than another; it goes to how effectively it has been implemented and whether the outcomes or impacts of it are what was expected as a result of it. But, even when you get to there, we can't, from an audit perspective, say that the policy is wrong, because there are no alternatives for us to say that something else would be better. We can only comment on its relative performance, you could say.
2.49
The Auditor-General further emphasised that the ANAO’s role is to examine the implementation of policies, rather than passing judgement on a government’s decisions to adopt particular policies:
I don't believe, in our reports, we ever go to the point of saying, 'That's a really dumb idea to have that policy,' because that's not our job. The government of the day, and the parliament, establishes the policy and the framework of what's being undertaken. Our work goes to how well it was undertaken. It also goes to how effective the Public Service was in advising government in the establishment of policy. So our reports sometimes will go to a point of saying, 'This policy was established, but, if you look at the evidence base that the Public Service gave to the government in making that decision, it wasn't very robust.' But we would very rarely—and I can't recall any circumstance where we would—say 'and therefore it's a bad policy', because our work is about the implementation of policy and the actions of the Public Service, not the decision that's been taken.
But policy is a very broad thing, and sometimes we get arguments from entities that their policy decision to administer a particular government program is policy and we shouldn't question that. Well, you can drag policy right down the chain. Our interpretation of that principle—which isn't a legislative principle; it's a general principle of operation—is that our job isn't to say the government has established, or the parliament has established, a good or bad policy. Our job is to look at what the bureaucracy has done with respect to its support for the establishment of the policy and the implementation of it.
2.50
Asked how the ANAO defines ‘government policy’, the Auditor-General explained that there is inherent difficulty applying a single, exhaustive, definition:
I don't think there is a definition. It's very difficult to find a definition, because 'policy' means a whole range of issues. Departments have policies—say, policies around how they undertake financial management—and set out policies around the way they operate. Services Australia has a whole pile of policies about how it implements the law with respect to the payment of welfare payments. Tax has a whole pile of policies around those. We don't interpret those to be the policies that we don't comment on, because the policy framework is what's set out in the legislation, which is, 'You've got to achieve this.' The subpolicies, rules, frameworks and guidelines that sit underneath that go to the operationalisation of policies. So, when we undertake audits, generally we wouldn't go to commenting about, say, the pension policy and saying, 'Pensions are too high or given to the wrong people', because that policy framework is set by the parliament, which established clearly what our role is, which is to look at the implementation of that policy underneath the framework and see whether the operational policy is consistent with what parliament intended and whether it has then been implemented. The broad risk is it's too murky to put in a definition on that.
Committee comment
2.51
The Committee notes the Auditor-General's observation that it is difficult to define government policy, yet notes that without outlining parameters as clearly as possible, some confusion may potentially arise. The role of the ANAO in supporting ‘accountability and transparency in the Australian Government sector through independent reporting to the Parliament’ is clear. The ANAO may examine the quality and evidentiary basis for policy advice from or commissioned by public sector agencies to government, however as the Auditor-General observed, the ANAO does not assess the relative merits of government policy or make findings regarding a government’s decision to adopt a particular policy.
2.52
Establishment of clear published guidelines, developed in consultation with the ANAO, JCPAA and relevant entities will clarify the role of the Auditor-General and ANAO and make it clear to all observers.
2.53
The Committee recommends that the Australian National Audit Office (ANAO), in consultation with the Joint Committee of Public Accounts and Audit, Department of Prime Minister and Cabinet, the Australian Public Service Commission and other relevant entities, develop and publish guidelines to clarify the role of the Auditor-General and ANAO and make it clear to all observers that it is not the role of the ANAO to assess the relative merits of government policy.
Clarifying the ANAO’s mandate
2.54
Related to the question of independence, the mandate of the Auditor-General and the ANAO could be more clearly defined. This review highlighted that there are a number of issues relating to the ANAO’s mandate where there is a lack of clarity in the AG Act. These include expanding the Auditor-General’s powers to include the capacity to initiate mandatory annual audits of performance statements and performance audits of Government Business Enterprises (GBEs) and resolving technical mandate issues that limit the ANAO’s ability to audit some federally funded entities.
Performance Statement Auditing
2.55
Since the introduction of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), Commonwealth entities are required to produce annual performance statements. The minimum requirements for what are included in the annual performance statement are outlined in the PGPA Rule 2014:
The annual performance statements address the non-financial performance of an entity and must provide information about the entity's performance in achieving its purposes.
2.56
The ANAO argued a gap in the Commonwealth assurance framework is ‘reliable audited performance information in entity performance statements’. Commonwealth entities can self-report on performance with limited options available to the parliament to ensure the information presented to them is accurate.
2.57
The Auditor-General explained the importance of auditing annual performance statements and that the ANAO is ready to expand its mandate in this area:
When the PGPA Act was written, it started the process of putting in place a rules framework for that to happen. The committee has looked at it in the past and said that we should move to mandatory performance auditing. Independent review of the PGPA Act said that it should be the direction we have and to do a pilot of it. The Minister for Finance asked for a pilot to be done. We've done the pilot and provided a report to you. We think we're ready to start rolling this out. I think it's really important.
I think non-financial performance information is at least as important, if not more important, than financial performance information for the parliament to understand and have assurance that what they're being told about how entities is going is accurate. I think it's time to get on with it, basically, and start making it happen.
2.58
In Report 469, tabled in December 2017, the JCPAA recommended that:
the Australian Government amend the Public Governance, Performance and Accountability Act 2013 (PGPA Act), and the accompanying rules and guidance as required, as a matter of priority, to enable mandatory annual audits of performance statements by the Auditor-General of entities selected by the Auditor-General for review, with the Department of Finance (Finance) to report back to the Committee on progress on this matter, including consultation with the Auditor-General and Commonwealth entities on implementation timeframes and capacity building.
2.59
The 2018 Independent Review of the PGPA Act recommended that:
The Finance Minister, in consultation with the Joint Committee of Public Accounts and Audit, should request that the Auditor-General pilot assurance audits of annual performance statements to trial an appropriate methodology for these audits. The Committee should monitor the implementation of the pilot on behalf of the Parliament.
2.60
In line with this recommendation, on the request of the Minister of Finance, the ANAO conducted a pilot program of audits of annual performance statements for 2019-20. This pilot program audited the performance statements of three agencies, with a report focused on two agencies tabled in February 2021.
2.61
In the 2021-22 Budget, the ANAO received additional funds to ‘deliver a staged program of performance statement audits — from three audits in 2021–22 increasing to 14 audits by 2024–25’.
2.62
However, the ability of the ANAO to conduct audits of annual performance statements is still dependent on a request being made by the finance minister.
Committee comment
2.63
The Committee notes the success of the recent pilot program of the audits of annual performance statements:
Full implementation of mandatory auditing of entity performance statements would give the Parliament the same level of assurance over non-financial performance information that it currently receives for financial performance information. This should result in improvements in the quality of performance information provided to the Parliament.
2.64
The Committee encourages the ANAO to continue building capacity to undertake this important project of work, and recommends amendments such that annual performance statements are able to be initiated without the need for approval or direction from the JCPAA or Finance Minister.
2.65
The Committee recommends that the Auditor-General Act 1997 be amended so that audits of annual performance statements are able to be initiated without the need for approval or direction from the Joint Committee of Public Accounts and Audit or Finance Minister.
Government Business Enterprises
2.66
The ANAO may conduct performance audits of Government Business Enterprises (GBE), but only at the request of the JCPAA.
2.67
A GBE is a Commonwealth entity or company that is prescribed by section 8 of the PGPA Act. Examples of GBEs include:
Defence Housing Australia;
Australian Naval Infrastructure Ltd;
Australian Rail Track Corporation Ltd;
Moorebank Intermodal Company Ltd;
2.68
The ANAO argued that the nature of GBEs has fundamentally changed, and it would be appropriate for the ANAO to be able to initiate audits into these types of entities without requiring a request from the Committee:
We think the nature of government institutions has changed quite a bit over the last couple of decades and the original rationale for having restrictions on our ability to undertake audits of government business enterprises isn't as relevant today as it was in the past […] That's largely because government business enterprises at the moment tend generally to have some significant public policy purpose and public resourcing allocated to them to achieve it.
2.69
The Australasian Council of Auditors General discussed coverage mandate, the types of entities a SAI can audit:
Historically, a SAI’s coverage mandate has been limited to “core” public sector entities such as Government departments. However, Governments are now funding and delivering public services through a variety of different legal entities such as Government Owned Entities. It is important that SAIs continue to have sufficient coverage mandate to audit a broad range of public sector entities, regardless of corporate structure, to ensure they are held accountable for what they do. The ability to audit private sector entities delivering services on behalf of the public sector is enshrined in most ACAG jurisdictions. In practice, these powers are used judiciously and for major contracts.
Currently the Act prevents the Auditor General from conducting performance audits of Commonwealth authorities that are Government Business Enterprises (GBEs) and wholly owned Commonwealth companies that are GBEs without a request from the JCPAA (that may be initiated by the Auditor General, but the request needs to come from the JCPAA). Since the last review of the Act, when this requirement was retained, the nature of a GBE has changed significantly, and many obtain significant government equity to invest in projects that would not be able to be delivered without public sector investment.
2.70
The ANAO noted that, while to date there has not been any problem in auditing GBEs through the JCPAA request process, this limitation on the Auditor-General’s mandate ‘is inconsistent with Principle 3 of the Mexico Declaration, in that the Auditor-General does not have discretion to conduct performance audits of GBEs without approval’.
2.71
The GBE issue was previously considered by the Committee in Report 419 (the last review of the Act, tabled in 2010) in which it recommended that the AG Act be amended to give the Auditor-General authority to initiate GBE audits without the need for a request from the JCPAA. However, this change was not implemented by the Australian Government. The recommendation was made again in 2017 in Report 469.
Committee comment
2.72
The Committee recognises that the nature of GBEs has changed over the decades. Previous GBEs such as Telstra, Qantas and the Commonwealth Bank were subject to market pressures. Contemporary GBEs (whilst still subject to pressures not necessarily experienced by other federally funded entities) often now operate in areas where the private sector has not invested.
2.73
Currently the Auditor-General must get approval from the JCPAA to conduct GBE audits. Removing the approval requirement will increase the independence of the Auditor-General, and will appropriately reflect the changed role of GBEs and keep the ANAO’s mandate consistent with the Mexico Declaration.
2.74
The Committee recommends that the Auditor-General Act 1997 be amended to provide the Auditor-General with the authority to initiate performance audits of Commonwealth-controlled Government Business Enterprises.
Operation and impact of Section 37
2.75
Issues were raised regarding the operation and impact of section 37, particularly in relation to timing considerations. Section 37 of the AG Act requires that the Auditor-General not include certain information in a public report if:
(a) the Auditor-General is of the opinion that disclosure of the information would be contrary to the public interest for any of the reasons set out in subsection (2); or
(b) the Attorney-General has issued a certificate to the Auditor-General stating that, in the opinion of the Attorney-General, disclosure of the information would be contrary to the public interest for any of the reasons set out in subsection (2).
2.76
The fundamental principle underpinning this section, according to the ANAO, is that the Auditor-General ‘should report independently and publicly to the Parliament in a manner that serves the public interest’. It also operates as a ‘safeguard’ to limit the disclosure of material that would be contrary to the public interest, thus balancing the Auditor-General’s powers to access information without restriction. This principle is in accordance with principle 6 of the Mexico Declaration, relating to the freedom of SAIs to determine the content of audit reports.
2.77
The Committee’s inquiry into the issuing of a section 37 certificate outlines the most recent instance where the section has been used to prevent the publication of certain material. The ANAO outlined the circumstances that prompted the inquiry:
In summary, the Auditor-General was especially concerned that the certificate was not limited to prevent the disclosure of ‘particular information’ but required the omission of ANAO analysis and part of the audit conclusion. The requirement to omit part of the audit conclusion had the effect of limiting the scope of the audit, as that part of the conclusion that could not be reported was pervasive to the overall objective of the audit. The Auditor‐General was therefore unable to provide a report to the Parliament which met the auditing standards under which ANAO audits are conducted. Accordingly, the Auditor‐General included a disclaimer of conclusion in the public report to the effect that he was unable to table a report that contained a clear expression of his conclusion against the audit objective[.]
2.78
The Committee made a number of recommendations in order to address the concerns raised in relation to section 37, including:
That a future review of the AG Act consider a legislated statutory timeframe requiring the Attorney-General to make a decision in relation to a section 37 application, including mechanisms to self-execute time extensions in consultation with the Auditor-General and the Committee; and
That a future review of the AG Act consider other matters such as:
The provision of a confidential report to be provided to the Chair of the Committee and relevant Ministers;
Mechanisms to ensure consultation with the Committee in relation to a proposed certificate’s effect on the publicly available conclusion or information of an audit; and
Amendments of the types of certifications (including ensuring that certain types require consultation with the Committee) and ensuring that substantive reasons are provided when a certificate is issued.
2.79
The ANAO expressed its view that, while ‘the fundamental principles behind section 37 are appropriate … it could be improved’. It put a number of suggestions forward for potential reform to improve the operation of section 37, including:
In situations where a confidential report is provided to ministers under section 37 (with or without the issuance of a certificate by the Attorney-General), to also provide the Parliament with the report, via the JCPAA, in order to enhance transparency;
Distinguishing between different types of disclosures to ensure that content involving highly sensitive material (i.e. material relating to national security or cabinet deliberations) are treated appropriately in comparison with disclosures that may constitute a lesser degree of seriousness (e.g. commercial interests or Commonwealth-state relations);
The establishment of a parliamentary process in the event that a proposed certificate affects the audit conclusion, or information not otherwise prohibited from disclosure, such as a consultation process with the JCPAA;
A procedural step added to the issuance of a certificate, consisting of the disclosure of the certificate being referred back to the Auditor-General for notification purposes, and also notifying the JCPAA of the potential section 37 certificate;
Implementing a time limit for issuing a certificate (as recommended in Report 478); and
Providing substantive reasons for the issuance of a section 37 certificate.
Committee comment
2.80
Section 37 of the AG Act is a rarely used but critical element of the Auditor-General’s work. The Committee accepts that some of the issues explored in its previous inquiry were of importance.
2.81
The lack of a statutory timeframe to ensure that the Attorney-General can report requests that are under active consideration is an omission from the AG Act, which the Committee believes should be addressed. The statutory timeframe should include a self-executing provision to obtain additional time in the event that the Attorney-General determines this is needed to make a decision.
2.82
The Committee is of the view that substantive reasoning should be required to be provided as part of the certification process. While this may not be able to contain detailed information due to the need for non-disclosure, this would at least provide the ANAO and the JCPAA with an indication of what prompted the issue.
2.83
The Committee recommends, as per Report 478, that the Auditor-General Act 1997 be amended to include:
A statutory timeframe of 28 days be legislated in which the Attorney-General is required to make a decision in regards to a section 37 application, and included in this legislative amendment is a mechanism for the Attorney-General to self-execute time extensions for this decision, subject to notification of the extension to the Auditor-General and the Joint Committee of Public Accounts (JCPAA) and Audit;
A provision for a confidential report to be provided to at least the Chair of the JCPAA along with relevant Ministers;
That the JCPAA be consulted on a confidential basis if a proposed certificate affects the audit conclusion or information not otherwise prohibited from disclosure;
To consider amendments to distinguish between types of certificates to at least require confidential consultation with JCPAA before certificates are issued for non-national security matters; and
That substantive reasons be provided when a certificate is issued.
2.84
The Committee recommends that the Public Accounts and Audit Committee Act 1951 and the Auditor-General Act 1997 be amended to require that the Joint Committee of Public Accounts and Audit and the Auditor-General be notified of applications for section 37 certificates.
Technical mandate issues
2.85
With regards to the ANAO’s ability to audit some entities funded entirely by the Commonwealth, the ANAO described these as:
… technical gaps in the Auditor-General’s mandate which result from either historical reasons, or the PGPA Act using definitions in accounting standards designed for the private sector that don’t take into account some public sector nuances.
2.86
The ANAO identified two instances where entities were unintentionally excepted from the Auditor-General’s mandate, even though the entities are entirely funded by the Commonwealth.
2.87
The Norfolk Island Health and Residential Age Care Service (NI Health) is funded entirely though Commonwealth appropriations. This entity was established under the laws of Norfolk Island before self-government ended. Because the PGPA Act defines Commonwealth entities as a body corporate that is established by a law of the Commonwealth, NI Health is not classified as a Commonwealth entity and as such there is no legal obligation for NI Health to be audited by the ANAO.
2.88
A broader issue relating to unintentional exceptions to the Auditor-General’s mandate is examples of entities that are jointly controlled by corporate Commonwealth entities.
Entities jointly controlled by corporate Commonwealth entities also fall outside of the Auditor-General’s mandate. This is because section 8 of the PGPA Act defines a subsidiary of a corporate Commonwealth entity or Commonwealth company, as an entity that is controlled by that corporate Commonwealth entity or Commonwealth company. The PGPA Act states that control has the meaning in the accounting standard that applies for the purpose of deciding whether a company has to prepare consolidated financial statements under the Corporations Act 2001 (this is AASB 10 Consolidated Financial Statements (AASB 10)).
The AASB 10 definition of “control” is based on the concept applicable to Corporations Act companies that all entities have a single ultimate parent company. This concept is not always applicable to corporate Commonwealth entities. For example, the National DAB Licence Company Limited (National DAB) is owned in equal shares by two corporate Commonwealth entities being the Australian Broadcasting Corporation (ABC) and the Special Broadcasting Service Corporation (SBS). Under the AASB 10 definition of control, neither the ABC or SBS controls National DAB and therefore despite 100% of its shares being held by corporate Commonwealth entities, it is not a subsidiary of a corporate Commonwealth entity and falls outside the Auditor-General’s mandate.
Committee comment
2.90
The technical mandate issues that limit the Auditor-General’s ability to conduct audits of some federally funded bodies need resolution. This includes expanding the definition of Commonwealth entities under the PGPA Act to include all entities funded by appropriations or controlled by the Commonwealth.
2.91
The Committee notes that there have been attempts to rectify this issue with Department of Infrastructure, Regional Development and Cities requesting the ANAO conduct an audit of NI Health. However, this does not resolve the key problem, i.e. entities that fall outside of the PGPA Act definition of Commonwealth entity, even when such entities are wholly funded by the Commonwealth.
2.92
The Committee recommends that the Auditor-General Act 1997, the Public Governance, Performance and Accountability Act 2013 and any other relevant legislation be amended such that the Auditor-General is the auditor of all entities funded entirely by appropriations, including those jointly controlled by corporate Commonwealth entities.
Other ways to clarify the ANAO’s role
Implementation of agreed recommendations by entities
2.93
A key feature of ANAO audits is the recommendations made. These are made in consultation with audited entities before being finalised. The ANAO explained:
…at times audited entities have provided responses that do not state whether they agree or disagree with the audit recommendations and therefore it is more difficult for the JCPAA and Parliament to hold those entities to account for their implementation of audit recommendations. The JCPAA noted in its report 472 Commonwealth Procurement – Second Report that “The Committee agrees with the Auditor-General that, although Commonwealth entities are not required to indicate agreement or disagreement in this regard, this is not a ‘desirable precedent’.” Consideration could be given to whether the Act should include requirements for accountable authorities to be required to clearly state whether they agree or disagree with particular audit recommendations.
Consideration could also be given to whether the Act or the PGPA Act should bind accountable authorities to implement any audit recommendations that they have agreed to. Alternatively, the wording of provisions in the PS Act could be changed so that the duties and responsibilities of secretaries and agency heads require an additional obligation to be bound to written commitments made to implement agreed recommendations of the Parliament and the ANAO.
2.94
Audited agencies may respond to the recommendations, which are included within the report that is tabled in the Parliament. Audited entities may agree, agree with qualifications or disagree. The Auditor-General explained:
You'll notice that with our recommendations we don't try to tell people how to do things; we tell them what they need to fix. Our recommendations tend to be high because we're not management consultants; we go in and look. When we're going through the audit, they get draft recommendations. We take feedback on them, and where there's disagreement we try and work through the disagreement not at the expense of our work but in trying to get to a position where the entity accepts that what we're suggesting is right and has a way forward for achieving it. Our objective is to get agreement. If we can't get agreement, our objective is for the parliament to know very clearly why there isn't agreement. […] We think it's important that entities agree or, when they don't agree, say precisely why they don't agree, because that's what the parliament needs to know.
2.95
The Auditor-General elaborated on the problem with audit recommendations being ignored:
…if an entity commits to parliament that they're going to do something, they should be required to do it and be held accountable for doing that. Part of the reason we started up that series of audits into the implementation of recommendations—not only ours but parliamentary committee recommendations—is that we thought that, with these commitments to parliament by entities that they're going to do things, there should be some mechanism to get some assurance back into parliament that it's happening.
How strongly do I feel about it? I think that accountable authorities should be held to account for doing what they tell parliament they're going to do. I think it's really quite important, because it's a key plank of how our democratic governance structure works: that agencies are accountable to the parliament for their actions.
Efficient timeframes
2.96
Since 1979, the ANAO has been required to give a timeframe of 28 days’ notice of a proposed performance audit report for an entity to provide feedback and comments.
2.97
The ANAO identified that this timeframe was introduced before computers were commonplace and the internet was readily available, and therefore:
The 28-day period therefore does not take into account the efficiencies of electronic document production, review and communication.
The 28-day requirement contributes to delaying audit process and can cause challenges when audits are time sensitive, such as when a performance audit is conducted in response to a Parliamentary or Ministerial request.
2.98
The ANAO suggested moving to a 21-calendar day timeframe, noting that ‘the proposed report is not the audited entities first opportunity to see the report and the ANAO has a practice of providing report preparation papers for early consultation before providing proposed reports’.
2.99
With the exception of NSW, other Australian jurisdictions have shorter consultation period in comparison with the Commonwealth model: ‘The midpoint appears to be a 14-day consultation period with the ACT, Victoria and WA having either a 14 day or 10 business days consultation period’.
References to other agencies
2.100
The ANAO highlighted an ambiguity in the AG Act, wherein the Auditor-General is able to refer information received confidentially to the Australian Federal Police (AFP), but not to other integrity agencies. Some examples of such agencies include the Australian Commissioner for Law Enforcement Integrity (ACLEI), the Inspector-General of Intelligence and Security (IGIS) or the Commonwealth Director of Public Prosecutions.
2.101
As the ANAO noted, there are provisions in the AG Act allowing the Auditor-General to share information with relevant agencies, but any possible ambiguity should be removed:
Subsection 36(2) of the Act specifically allows the Auditor‑General to disclose particular information to the Commissioner of the Australian Federal Police (AFP), if the Auditor‑General is of the opinion that the disclosure is in the public interest. The ANAO understands that subsection 36(2) is primarily intended for clarification purposes, as the Auditor-General could also disclose information to the AFP and integrity agencies under other provisions such as section 23 of the Act. However, subsection 36(2) may allow slightly broader disclosures, as it is based on a public interest test.
2.102
The Auditor-General clarified that, an amendment of the AG Act to broaden the Auditor-General’s disclosure of information powers would be a simple clarification, about ‘the avoidance of doubt’:
My concern is, given that there's a reference to one body and not to the others, whether someone could argue that we can't do it. I have disclosed information to some of the other bodies when I thought it was appropriate to do so, and I would continue to do that because it's the right thing to do. I believe that the broader powers within the act give me the ability to disclose information. This is a belt-and-braces view. As we say in our report, it's about the avoidance of any doubt and also so we can think more broadly about it than we can at the moment.
Access to information
2.103
Another issue highlighted during the inquiry was the importance of the ANAO continuing to have appropriate access to relevant records of decisions. The ANAO emphasised that their work will remain reliant on public sector employees accurately maintaining records of decision-making processes, including where that information exists on encrypted, or through less-official, communications channels. This issue is not widely canvassed in this report but has been considered in a concurrent inquiry of the JCPAA that is currently underway.
2.104
The ANAO also noted, in the context of widespread remote working as a result of the COVID-19 pandemic, that a question had arisen regarding the AG Act’s provisions regarding remote access. Legal advice obtained by the ANAO and provided to the Committee indicated that the AG Act, as drafted, does not envisage entirely remote access to an audited entity’s records:
In summary, the legal advice indicates that the text of section 33 of the Act does not support remote access, as it is drafted to apply subsequent to an authorised ANAO official physically entering and remaining on an entity’s premises.
[…]
The legal advice suggests that consideration could be given to seeking an amendment to the Act which would update these powers to allow more clearly for remote access and to enable the Auditor-General to specify the form of production. It is not intended that any amendment increases the information-gathering powers in respect of the type of information that can be sought, just the form and/or manner in which information is provided.
2.105
The ANAO acknowledged in their submission that ‘there are a range of options that could be considered for this purpose and the attached legal advice provides some initial thinking on options’. The JCPAA believes further consideration should be given to this matter in a future inquiry. At the time of the submission being published, the Committee's draft report was under consideration and as such, no further public hearings were scheduled to consider the matter.
Committee comment
2.106
Changes are warranted to ensure audited entities are accountable for the implementation of any audit recommendations they agree to. Some agencies agree to recommendations with qualifications, making it difficult for the JCPAA and the Parliament to hold those agencies to account. The Committee accepts that qualifications can be necessary and reasonable in some instances. Changes to either the PGPA Act or the Public Service Act 1999, or both, could require agency heads or secretaries to adhere to written commitments to implement agreed recommendations of the Parliament and the ANAO.
2.107
The Committee is interested in improving the efficiency of the ANAO. One potential efficiency would be to reduce the consultation period under s19 of the Act from 28 days to 21 days. The Committee notes the ANAO's observation that a shortened timeframe would improve efficiency of responses from audited entities.
2.108
The Committee accepts the ANAO's evidence that its practice is to provide report papers for early consultation. However, if timeframes were reduced in legislation, consequential amendments to ensure the ANAO’s current practice is maintained in legislation would also be important to consider.
2.109
The Committee further notes that no evidence was received from audited entities as to the potential impact of such a legislative change.
2.110
As such, the Committee makes no recommendations for change to the legislation in relation to timeframes. Depending on the nature or length of the relevant audit of an entity, the 28-day timeframe may be appropriate, although a shorter timeframe may also be appropriate for audits with less scope. The Committee notes that the PM&C could give further consideration to a possible change in this timeframe in consultation with agencies.
2.111
The Committee is of the view that requiring greater accountability by audited entities to implement agreed audit recommendations will help to improve overall outcomes of the auditing process.
2.112
The Committee agrees that the Auditor-General currently appears to have sufficient power to disclose information to relevant agencies. However, the insertion of a note in the AG Act to confirm that the specific reference to the AFP does not preclude the Auditor-General disclosing information to other relevant agencies as needed would be a useful clarification to avoid any uncertainty.
2.113
While not a focus of this inquiry, the Committee emphasises the need for public sector entities to maintain accurate and relevant records of decision making, regardless of the technology used to create them.
2.114
Late in the inquiry, the Auditor-General made a further submission to the inquiry regarding remote access to entities. The Committee was not able to schedule a public hearing to inquire into this matter or consider any of the options outlined in the submission. Given this, no substantive recommendation is made on this issue, however the Committee considers it is an issue that should be considered further by the JCPAA in the next term of the Parliament.
2.115
The Committee recommends that the Australian Government consider how audited entities comply with audit recommendations that they agree to, and how they can be better accountable for their implementation. This may include changes to the Public Governance, Performance and Accountability Act 2013.
2.116
The Committee recommends that the Auditor-General Act 1997 is amended to clarify that the Auditor-General’s power to disclose information to the Australian Federal Police is not intended to preclude the Auditor-General disclosing information to other relevant agencies as needed.
2.117
The Committee recommends that the Joint Committee of Public Accounts and Audit consider, in the next term of Parliament, the matters raised by the Auditor-General regarding access to information from audited entities by remote means.