3.1
Audit Report No. 33 (2016-17), Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2016, provides the results of the final audits of the Consolidated Financial Statements and the financial statements of all Commonwealth entities.
3.2
The Joint Committee of Public Accounts and Audit (JCPAA) inquiry into Commonwealth financial statements focused on the following six matters regarding the evidence provided from public hearings and submissions, and Audit Report No. 33:
Consolidated Financial Statements: audit findings
Financial statements: audit findings by portfolio
Financial statements: audit findings by category
Improving financial reporting and disclosure
Consolidated Financial Statements: audit findings
3.3
Government accountability is supported by the preparation and audit of the Consolidated Financial Statements (CFS). The CFS presents the consolidated whole of government financial results, inclusive of all Australian Government controlled entities.
3.4
The 2015-16 CFS was prepared in accordance with section 48 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the requirements of the Australian Accounting Standards, including Australian Accounting Standards Board 1049, Whole of Government and General Government Sector Financial Reporting.
3.5
The 2015-16 CFS was signed by the Minister for Finance on 27 November 2016 and an unmodified auditor’s report was issued on 28 November 2016.
3.6
One area of interest at the public hearing was whether the CFS reported Commonwealth entity expenditure on contracts and consultancies. The Department of Finance (Finance) explained that each entity produces its own financial statements and Finance then consolidates these statements, in their audited form, for the CFS—‘we consolidate, which means you aggregate and then you eliminate … Then we present the data in a form which is itself set by the accounting standards’.
3.7
Information on the value of contracts and consultancies is instead available from AusTender, the Australian Government’s procurement information website. AusTender enables entities to meet their reporting obligations for contracts and consultancies under the Commonwealth Procurement Rules (CPRs). In addition, entity annual reports contain information about actual expenditure on contracts for consultancies. The annual report requirements (as approved by the JCPAA, under the PGPA Act) are set out in the PGPA Rule 2014. Section 17AG(7), ‘Consultants’, of the PGPA Rule states (for non-corporate Commonwealth entities) that:
The annual reports must include the following:
(a) a summary statement of the following:
(i) the number of new contracts engaging consultants that were entered into during the period;
(ii) the total actual expenditure during the period on all such contracts (inclusive of GST);
(iii) the number of ongoing contracts engaging consultants that were entered into during a previous reporting period;
(iv) the total actual expenditure during the period on those ongoing contracts (inclusive of GST);
(b) a statement that “During [reporting period], [specified number] new consultancy contracts were entered into involving total actual expenditure of $[specified million]. In addition, [specified number] ongoing consultancy contracts were active during the period, involving total actual expenditure of $[specified million].”;
(c) a summary of:
(i) the policies of the entity on selecting and engaging consultants; and
(ii) the procedures of the entity for selecting consultants; and
(iii) the main categories of purposes for which consultants were engaged;
(d) a statement that “Annual reports contain information about actual expenditure on contracts for consultancies. Information on the value of contracts and consultancies is available on the AusTender website.”.
3.8
More specific information on the reporting of contracts and consultancies was requested from Finance—in particular, the total value spent on external consultants and contractors (including on-hire labour contractors), by service provision type (policy advice, project management, capacity supplements) for each Commonwealth entity, as well as the total number of external consultants providing services for each entity, including the top ten suppliers by value over recent years.
3.9
Finance responded that a number of standard searches and reports on AusTender would provide information on these matters and that, as Finance deals with aggregates, individual entities would also be well placed to provide such information. Non-corporate Commonwealth entities are required to report on AusTender any procurement contract valued at $10,000 and above and, in accordance with annual report requirements, entities are required to flag contracts in AusTender that relate to consultancy services. In terms of contracting, Finance explained that ‘contractors are less clearly defined as they can refer to temporary personnel, or any professional or expert services provided under a contractual arrangement that does not meet the definition of consultancy’. Accordingly, Finance advised that, given the variety of methods available to engage personnel, individual entities would be best placed to provide details relating to contractors. Finance provided consultancy data from AusTender for the previous three financial years, identifying the top ten suppliers by total contract value.
3.10
As to how current accounting standards, Commonwealth financial statements and Australian National Audit Office (ANAO) audits ensure that the accountability needs of the Parliament and the public continue to be met as regards entity reporting of expenditure on contracts and consultancies, the ANAO responded:
When you are looking at the financial statements, you are looking at the financial performance of an organisation and its reporting of that. You may argue that the choices … you make around your expenditure might go to that … There are other places where that sort of transparency occurs: obviously, in annual reports of agencies, AusTender …—and certainly in our performance audits.
3.11
At the time the Committee was concluding its report, the Australian Parliament’s Joint Select Committee on the Commonwealth Procurement Framework tabled its report on procurement, including the CPRs. An independent review of the operation of the PGPA Act and Rules will also be conducted post July 2017. Under the Act, the Finance Minister must, in consultation with the JCPAA, cause the independent review to be conducted, with the Minister to table the review in the Parliament.
Financial statements: audit findings by portfolio
3.12
The Auditor-General issued auditor’s reports on the 2015-16 financial statements of 246 Commonwealth entities, up until 9 December 2016. All auditors’ reports were unmodified.
3.13
A total of 245 findings were reported to entities as a result of these financial statement audits, comprising:
4 significant—Department of Education and Training (Education and Training); Administration of Norfolk Island; and National Disability Insurance Agency (NDIA)
3.14
The significant audit finding for Education and Training concerned the number of estimated incorrect payments being made to childcare service providers. As a result of improved monitoring and compliance activities, the department advised the ANAO that the statistical estimate of incorrect payments due to non-compliance had reduced but ‘remains at $546 million’. The ANAO noted that it would ‘continue to assess the effectiveness of these activities and monitor the statistical estimate of incorrect payments as part of the 2016-17 audit’. The two significant audit findings for the Administration of Norfolk Island concerned its corporate governance framework, and asset management and capital budgeting. The ANAO noted that these would be matters for the Norfolk Island Regional Council, given the cessation of the Administration of Norfolk Island and the Auditor-General’s role in auditing its financial statements.
3.15
There was interest at the public hearing in further exploring the significant audit finding for the NDIA, concerning the assurance framework and compliance program for the National Disability Insurance Scheme (NDIS). As set out in the ANAO report, access to the NDIS is regulated via NDIA’s assessment and approval of individual applicants against eligibility criteria. Once approved as eligible for the scheme, participants require an approved participant plan, outlining the reasonable and necessary supports they require. Participants can then choose to self-manage their plan or have it managed by the NDIA. Where plans are managed by the NDIA, payments are made to the provider, subject to claims lodged online. Providers are expected to maintain evidence supporting claims. Self-managed participants also claim online, but funds are paid directly to the individual participant. Self-managed participants are required to keep copies of receipts.
3.16
The ANAO reviewed the NDIA’s progress towards implementing an assurance framework and compliance program to ensure the integrity of claims paid to both scheme participants and service providers. The ANAO found there were ‘no documented compliance activities for payments made directly to self-managed participants’ and the review program for provider payments was based on a non-statistical sample methodology that ‘does not allow results to be extrapolated across the population to estimate the potential rate of non-compliance within the scheme’. The ANAO also found that there was ‘insufficient documentary evidence to demonstrate quality assurance processes over the integrity of decisions made concerning provider registrations, participant identity or eligibility and participant plan approvals’. The ANAO pointed to NDIA advice that the NDIA Executive Management Group would oversee the implementation of a ‘comprehensive assurance framework’ during 2016-17, to examine payment integrity, as well as eligibility and plan approvals, for both self-managed and provider managed plans. The ANAO noted that it would review the progress made by the NDIA as part of the 2016-17 audit.
3.17
It was noted at the public hearing that self-managed care is a critical aspect of the design of the NDIS and that challenges in establishing a robust compliance framework must not become an excuse to move away from, or unreasonably limit, an individual’s choice for self-managed care. In this context, the ANAO was asked how the NDIA might most effectively address the audit findings on compliance activities regarding self-managed participants. The ANAO confirmed the ‘balancing act for an agency … delivering its policy intent is to not put in place compliance regimes that interfere with the sensible implementation of the policy intent’. However, the ANAO emphasised that the ‘Auditor-General would expect there to be a fit-for-purpose compliance framework addressing risk’, and its findings ‘go to the absence of a decent one’. As to whether there were other entities in the public or private sector the NDIA might learn from, the ANAO noted that:
Across the sector, there are many organisations that pay out money. They have to apply their mind to what is fit for purpose to manage their risks … in implementing remediation of this finding, which we expect to happen quickly—when we put in a ‘significant’ or a ‘moderate’ finding, we expect pace—there are plenty around who can assist the NDIA with this … quite often across compliance agencies there are good communications channels. The NDIA could approach many.
3.18
As to whether the NDIA’s own internal audit processes might have considered these issues, the ANAO confirmed that it does ‘look at the internal audit program to see whether or not there are activities in place to remediate findings of internal audit’. This can also influence the rating on a finding—‘certainly, if we had seen active management of a risk identified in internal audit in the course of our financial statements audit, that would have gone to the rating that we have given on the finding. It can actually give us some comfort that something is being done’.
3.19
More information was sought from the NDIA on its progress in addressing the findings of the ANAO’s 2015-16 financial statements audit—noting that the audit identified two moderate (Category B) findings and one minor (Category C) finding, as well as the one significant (Category A) finding. The NDIA confirmed that, ‘with the exception of the Category A finding, all other findings are considered to have been addressed’.
3.20
The NDIA explained that it was addressing the significant audit finding, concerning the assurance framework and compliance program for the NDIS, through the following range of measures:
Expanding its risk management framework to be responsive to the scale, complexity and speed of the NDIS rollout.
Building and maintaining a strong control and assurance environment that assists in the monitoring of high quality participant outcomes and supports financial sustainability.
Adopting a risk-based integrated assurance approach, supported by sophisticated data analytics (aligned with Australian Auditing Standards) to support compliance.
Implementing a governance structure to oversee the NDIA’s assurance activities aligned to Australian Prudential Regulation Authority guidelines.
3.21
The NDIA is also implementing a ‘comprehensive payment integrity program’, based on recommendations from recent reviews. The program includes ‘32 new initiatives to strengthen compliance’, with 11 initiatives having commenced and the balance scheduled as priority activities over the next 18 months. As part of these initiatives, a ‘comprehensive program of quality assurance testing has commenced’, including for participant eligibility, plan approvals and payment correctness, and a ‘technology enablement project is also underway’ to improve existing quality control (pre decision) processes. Testing regimes are based on ‘statistically valid sampling techniques which will allow for extrapolation of results to the full Scheme outlays’. The Scheme Actuary also undertakes ‘actuarial monitoring and comprehensive scheme-wide investigations of data quality and integrity issues, analysis of experience and comparison of actual with expected’, to enable identification of emerging areas of risk and ‘cost-effective targeting of resources towards these known areas’. In addition, the NDIA has commenced a process to review the experience of participants and providers, which will be an ‘important contribution to more robust processes, decisions and sustainable outcomes’.
3.22
As to which other entities (public or private sector) it could learn from in implementing such initiatives, the NDIA responded that it had ‘undertaken reviews which have drawn on the experience of industry experts and … benchmarked a wide-range of government, private and public insurance schemes’. Further, relationships have been established with federal agencies that have extensive experience with payment integrity, including the Department of Health, the Department of Employment and the Department of Veterans’ Affairs. These agencies have ‘shared their risk management and compliance frameworks and program experiences’. The NDIA continues to liaise with the Department of Social Services to draw from its experience in provider management and fraud prevention programs, and has seconded the National Manager Compliance from the Department of Human Services to assist in the implementation of operational assurance activities. The NDIA has also ‘drawn insights’ from the experiences of European and North American disability services in their delivery of self-management programs for people with disability.
3.23
As to whether its internal audit process had considered these issues, the NDIA noted that it maintains an annual risk-based internal audit plan ‘designed to test the efficacy of the NDIA’s critical control across key areas of potential exposure’, and that the ‘findings of all reviews are presented to the NDIA’s Audit Committee which also reviews management responses to the findings and monitors implementation of required actions’. The NDIA’s 2015-16 internal audit plan had identified two internal audit projects of direct relevance to the ANAO findings:
Firstly, an internal audit review of the NDIA’s self-management processes, undertaken in May 2016, pointed to the ‘need for greater governance over self-management processes and a requirement to tailor and adapt existing processes to reflect the nuances in self-management, including payment claiming’. While a payment audit program was in place, this was ‘not statistically valid as the program was in its infancy’. In response, the NDIA appointed an SES officer to ‘coordinate a cross-functional working group to oversee the implementation of agreed management actions in response to the audit findings’.
Secondly, a fraud monitoring and prevention internal audit review, finalised in May 2016, identified a number of recommendations to improve controls in this area—‘with the exception of one remaining management action relating to the implementation of a comprehensive communications strategy (due for completion by 30 June 2017), all actions arising from the review have been implemented’.
3.24
The NDIA further observed that its 2016-17 internal audit plan includes two reviews, to be completed by 30 June 2017, of relevance to the significant audit finding—‘data integrity adequacy to support better decision making and payment controls; and decision making for plan reviews to support quality decision making’. In addition, the NDIA stated that its focus on the issues raised by the significant audit finding would ‘continue with three other internal audits planned for 2017-18’.
3.25
There was also interest at the public hearing in the Commonwealth entities with multiple moderate findings as a result of the ANAO’s financial statements audit. Both the Australian Taxation Office (ATO) and the Department of Defence (Defence) had four moderate audit findings, the highest number across all entities (excepting Administration of Norfolk Island).
3.26
The ATO moderate audit findings were in regard to: estimation and allocation processes for revenue and expenses; debt provision assessments; support and quality assurance over manual inputs to the financial statements; and administration of penalties and interest.
3.27
The moderate audit finding regarding estimation and allocation processes for revenue and expenses was of particular interest. In its audit, the ANAO identified ‘several weaknesses’ with these processes, including the ‘absence of testing of the validity of selected inputs’; ‘need for greater consultation within the ATO of alternate assumptions’; and ‘limited documentation to support consideration of the impact of changes to methodologies and data inputs on the ATO’s financial statements’.
3.28
On whether it had identified similar shortcomings in revenue and expense estimate processes in past audits, the ANAO noted similar errors had been reported in previous years, but ‘it is not unusual with complex estimation processes of this nature to identify corrections that are required to the model or to the selection of the assumptions based on new information, which means that it refines the models each year, we audit it each year, and the agency adjusts it’. The ANAO provided further information on this matter in response to a question on notice, noting that ‘weaknesses with the ATO’s revenue and expenses estimation processes were previously reported by the ANAO in 2004-05 as two significant audit findings’ (in 2005-06, one finding was closed and the remaining finding subsequently reclassified as a result of remediation by the ATO). In addition, a ‘minor audit finding was reported to ATO’s management in 2007-08 in relation to the ATO’s revenue and expenses estimation processes’.
3.29
As to what extent the ATO might be exposed to risks presented by staff reductions and potentially increased workloads for those (including senior staff) tasked with reviewing and improving the estimation process, the ANAO explained that they ‘do not measure the staff on each activity in the preparation of the financial statements’, and that entities themselves have to make decisions about such risks:
for any accountable authority that is facing staffing adjustments, they have to make decisions about what the risks are and where risks might lie. When we look at an agency’s governance, we have a standard under which we do that on what the risks are to the preparation of the statements … For many organisations … we look at whether or not there are good processes, good record keeping, good training and good quality processes. It is very hard for the Auditor-General to comment that a reduction in staff may go directly to an item in a financial statement and a risk. The expectation, when we look at governance and risk management, is that the accountable authority is applying their mind to those risks, and we do not comment on resourcing matters per se in the preparation of the statements.
3.30
There was also interest in to what extent the ATO’s current estimation processes relied on staff expertise and corporate knowledge—noting the ANAO’s observation in the audit report that these processes ‘involve high degrees of complexity’. The ANAO responded ‘our expectation is that in any entity … the people with the right skills, knowledge, experience, access to information … are applied to the task … The first thing we do in an organisation is look at the governance, the risks et cetera. What we flag quite often—and the ATO would fall into this category—is making sure that the documentation and the training of people remains consistently good’.
3.31
Further information was sought from the ATO about to what extent it may have been exposed to risks presented by staff reductions and potentially increased workloads for those (including senior staff) tasked with reviewing and improving the estimation process. The ATO responded that the ‘branch responsible for preparing the administered revenue and expense estimates has maintained continuity in resources’, and that the ANAO audit findings concerning the ATO’s financial statements were ‘affected by the change in the ANAO’s view of the impact of likelihood and consequence on the estimation processes’.
3.32
The Defence moderate audit findings were as follows:
Three moderate audit findings concerned accounting for and valuation of Specialist Military Equipment (SME), including Defence Weapons Platforms (DWPs), Military Support Items (MSI) and Assets under Construction (AUC), noting:
[there is] complexity in measuring assets at fair value; … annual impairment and revision of useful lives are subject to a high degree of judgement and subjectivity; management of AUC is dispersed across numerous projects that have complex multi-year contractual arrangements and project management requirements; and large prepayments are often made in relation to the acquisition and sustainment of SME
One moderate audit finding concerned revaluation and impairment of general assets, noting issues with:
a high volume of capital works and associated purchases managed across numerous locations; completeness and accuracy of the fixed assets register; and accuracy of calculations of depreciation or impairment adjustments
3.33
Further information was sought from Defence about these matters. As to how it values its military assets—in particular, DWPs, MSI and AUC (jointly referred to as SME platforms)—Defence noted that these are ‘measured at fair value by reference to the highest and best use … physically possible, legally permissible and financially feasible in accordance with relevant accounting standards’. Following initial recognition at cost, ‘valuation of SME platforms is conducted every year’, and for SME platforms in service for less than 1 year (including AUC), ‘cost is treated as fair value’. The valuation of SME platforms is performed by senior Defence personnel as it requires ‘significant military expertise from senior Defence personnel including acquisition expertise from the Capability Acquisition and Sustainment Group of Defence and financial expertise from members of the Defence CFO Group’.
3.34
DWPs were valued for the financial year 2015-16 using the following approach:
3 Platforms had independent valuation conducted by Australian Valuation Solutions (AVS) with an effective date of 30 June 2016, all other Defence Weapons Platforms were valued by internal experts;
Air Force platforms were valued using the comparator approach by senior Defence personnel (where a comparator was available);
For all Defence Weapons Platforms that were in use for less than one year, the cost was treated as fair value; and
For all remaining Defence Weapons Platforms, the relevant index was applied to the historical cost of the asset and converted to Australian $ using the relevant foreign exchange rate where applicable.
3.35
Similarly, MSI were valued for the financial year 2015-16 using the following approach:
For MSI assets purchased in the financial year 2015-16, cost was treated as fair value (including all assets of similar nature);
For MSI assets that could be matched to an electronic price catalogue, the prices as per the electronic price catalogue were considered as fair values after the application of the relevant index and foreign exchange rate where applicable; and
For all remaining MSI assets, the relevant index was applied to the historical cost of the asset and converted to Australian $ using the relevant foreign exchange rate where applicable.
3.36
AUC were ‘not indexed as the cost of an AUC is considered to approximate is fair value’.
3.37
In terms of how it determines the useful life of an asset, Defence explained that this is ‘based on the expected operational serviceability of the asset’—‘an asset’s useful life is determined at the acquisition/inception of the asset/project by the relevant Senior Military Capability personnel as a part of Defence’s submission to the Cabinet. Further, there is an ongoing process through the Key Defence Assets Review’. As to why it provides prepayments, given that the CPR guidelines stipulate payment can only be on a deliverable, Defence responded that:
Prepayments are made … where Defence is contractually required to make prepayments to suppliers for the purchases of Military equipments and other purchases and expenses or where making a prepayment is advantageous to Defence, based on value for money considerations which are in accordance with Finance Estimates Memorandum 2014/27 issued by the Department of Finance. This memorandum allows Commonwealth Agencies to make prepayments against a contract if it is advantageous to Commonwealth Agencies.
3.38
Defence was also asked to explain the componentisation process for DWPs and how often this is undertaken. Defence responded that:
Componentisation is the separation of large/complex Defence Weapons Platforms into parts which are capable of being removed and/or replaced at different times over the life of the asset (i.e. have different useful lives). Major assets, such as SME Platforms, are componentised if it is likely that the components will have useful lives that differ significantly from the other parts of the asset. The useful lives of components may be determined with reference to the individual component or the related primary asset.
An annual componentisation review is undertaken by the CFO Group with the assistance of the Systems Program Offices (SPOs) in Defence Service groups (e.g. Navy, Army, Air Force) for Defence Weapons Platforms and other major assets.
3.39
As to whether the cumulative impact of several moderate audit findings—such as for Defence, the ATO and the Administration of Norfolk Island—would be a cause for greater concern, the ANAO explained ‘having a quantum of findings does not necessarily mean that there is an automatic higher risk’, as ‘each one is assessed in isolation’. However, if an agency has ‘recurring findings in governance or ongoing deficiencies’, that can lead to a ‘significant risk in the future’.
3.40
Five legislative breaches were also reported to Commonwealth entities during 2015-16:
three non-significant breaches
3.41
There was interest at the public hearing in the two significant legislative breaches involving the Northern Land Council—in particular, the unresolved significant legislative breach. As set out in the ANAO report, previous audits had identified non-compliance with the Aboriginal Land Rights (Northern Territory) Act 1976. This legislation establishes the Council’s responsibilities for payments regarding Aboriginal land within a specific time frame. During 2015-16, the ANAO identified that instances of non-compliance continued to occur as not all of the funds in the Council’s royalty trust account had been distributed to traditional owners within the specific timeframe. This therefore represented an unresolved significant legislative breach. As the ANAO further observed at the public hearing, while the Council had undertaken processes to improve this situation, at the completion of the 2015-16 financial statement audit, ‘there were still payments being made outside of the required time frame’.
3.42
As to what pressure was then put back on the Northern Land Council to address this matter, as a result of the audit, the ANAO noted that as part of the audit process each year ‘the auditors return and are provided an update’, but ‘to resolve it is the entity’s responsibility to implement procedures’.
Financial statements: audit findings by category
3.43
The Auditor-General issued auditor’s reports on the 2015-16 financial statements of 246 Commonwealth entities, up until 9 December 2016. A total of 245 findings were reported to entities as a result of the audits, comprising 4 significant, 32 moderate and 209 minor findings. The ANAO rated these audit findings across seven categories, as follows:
Compliance and quality assurance frameworks
Accounting and control of non-financial assets
Revenue, receivables and cash management
Human resources financial processes
Purchases and payables management
3.44
A total of 75 per cent of significant and moderate audit findings were in the following three categories:
0 significant findings; 7 moderate findings; and 82 minor findings
the ANAO found that a ‘lack of controls around privileged users increases the risk of unauthorised changes being made to systems and data, or unauthorised data leakage and is an area requiring sustained focus by entities’
Compliance and quality assurance frameworks
3 significant findings (Department of Education and Training; National Disability Insurance Agency; and Administration of Norfolk Island); 12 moderate findings; and 30 minor findings
the ANAO found there is a ‘need for entities to focus greater attention on: maintaining effective governance arrangements over third party or joint service delivery arrangements; and the risk management arrangements that support the effective engagement with risk in the delivery of programs’
Accounting and control of non-financial assets
1 significant finding (Administration of Norfolk Island); 4 moderate findings; and 30 minor findings
3.45
There was interest at the public hearing in further exploring the main area of weakness in the IT control environment category—identified by the ANAO as IT security management, particularly user access and monitoring of privileged users. The ANAO noted the need for increased monitoring of staff access—‘if a staff member changes roles, that their access changes accordingly; and, where those higher levels of access are provided to individuals, the privileged user access, that it is monitored regularly by an independent person’.
Improving financial reporting and disclosure
3.46
The Committee focused on three matters in terms of improving financial reporting and disclosure:
Financial reporting requirements for executive remuneration and Reduced Disclosure Regime
Financial reporting requirements for executive remuneration and RDR
3.47
Finance has issued a template to support Commonwealth entities with the preparation of streamlined financial statements. In 2015-16, the ANAO examined implementation of this template by 168 entities, identifying that 144 entities (86 per cent) had adopted the template to prepare their financial statements, resulting in ‘more concise and easier to read financial statements’. Of these 144 entities, 65 (45 per cent) had made further improvements to those included in the Finance template.
3.48
The ANAO pointed to ongoing initiatives by both Australian and international standard setters to streamline disclosures in financial statements. Australian Accounting Standards include a Reduced Disclosure Regime (RDR) option that allows for certain disclosures to be omitted from annual financial statements. The ANAO noted that Finance has indicated its intention to enable entities to move to RDR in future reporting periods—Finance is continuing to work towards the implementation of RDR under AASB 1053 Application of Tiers of Accounting Standards. The ANAO confirmed that it ‘supports these initiatives, to the extent that the needs of Parliament are met’.
3.49
There was interest at the public hearing in further understanding how the PGPA Financial Reporting Rule 2015 and RDR, under Australian Accounting Standards, are ensuring that parliamentary accountability needs are met. Both Finance and the ANAO emphasised that a better term for RDR is a ‘more accurate or a more relevant disclosure regime’, or ‘simplified reporting’. As Finance further explained, ‘not all types of things which the standards cover [have] relevance to all entities’:
At the moment—and this is part of what has been animating the AASB—there are many entities which, in order to comply with the accounting standards, have to provide information on things which they actually do not do. Typically, they have to provide information on certain sorts of financial instruments—for example, overseas-type financial instruments and these sorts of things which their business just does not do, yet the standard says, ‘You must fill in the form.’ The purpose of that work is to enable entities, private sector or public sector, to more relevantly provide information to their stakeholders. That means, in some cases, a small entity which never had any financial instruments would no longer produce a financial instruments table but an entity that did have financial instruments would produce those and would continue to produce those. At the consolidated level, we would continue to produce those things because, at the consolidated level, the government does have those things.
3.50
In this context, an area of particular interest at the public hearing was the financial reporting requirements for Commonwealth entities for senior executive remuneration. To further explore this matter, it is useful to provide some background on the Commonwealth financial reporting framework and how this has changed over time.
3.51
The Commonwealth financial reporting framework is based, in large part, on standards made independently by the Australian Accounting Standards Board (AASB). The framework is designed to support decision-making by, and accountability to, the Parliament. The AASB bases its accounting standards on the International Financial Reporting Standards (IFRS). Because the IFRS is designed primarily for use by private sector and for-profit organisations, the AASB amends the IFRS to reflect significant transactions and events that are particularly prevalent in the public and not-for-profit private sectors.
3.52
The current financial reporting requirements for Commonwealth entities are established under the PGPA Act, including:
the PGPA Financial Reporting Rule (FFR)
Finance PGPA Resource Management Guidance
3.53
The PGPA Act established Commonwealth entities in three categories: Commonwealth non-corporates; Commonwealth corporates; and Commonwealth companies.
3.54
The previous financial reporting requirements for Commonwealth entities, prior to 2014-15, included:
the Financial Management and Accountability Act 1997 (FMA Act)
the Commonwealth Authorities and Companies Act 1997 (CAC Act)
Finance Minister’s Orders (broadly equivalent to the PGPA Financial Reporting Rule)
3.55
Prior to 2014-15, the Finance Minister’s Orders, made under the CAC Act and the FMA Act, required all Commonwealth entities to provide detailed remuneration disclosures by band for senior executives, including key management personnel. Notes 6B and 6C in the model remuneration disclosures from the Finance Minister’s Orders set out these requirements in detail—see Figure 3.1 below.
3.56
Prior to the amendment of AASB 124 Related Party Disclosures (AASB 124), private sector disclosing entities were also required to disclose compensation for individual key management personnel under this accounting standard. However, from 1 July 2013, these requirements were deleted from AASB 124 to support international harmonisation. The amended AASB 124 now requires disclosure of key management personnel remuneration by major category of remuneration, not by band.
3.57
In 2014-15, with the introduction of the PGPA Act, disclosure requirements under the FRR were aligned with those of the amended AASB 124, and remuneration disclosure by band was discontinued. The explanatory ‘guide’ to section 27, ‘Key management personnel remuneration’, in the FRR states that the new rules require entities to ‘report the cost to the Commonwealth of employing senior management personnel for the reporting period, as opposed to reporting the individual benefits received by those persons’. The FRR does not therefore require any Commonwealth entity (Commonwealth corporates, Commonwealth non-corporates and Commonwealth companies) to provide detailed remuneration disclosures by band for senior executives. Essentially, as set out in the ANAO report, Notes 6B and 6C of the Finance Minister’s Orders, which set out the required model remuneration disclosures by band for senior executives (see Figure 3.1), were deleted from the FRR model remuneration disclosures.
3.58
As the ANAO noted, listed companies provide more detailed disclosures of individual key management personnel remuneration in a separate remuneration report under the remuneration reporting requirements of the Corporations Act 2001—see model remuneration disclosures from the Corporations Act, at Figure 3.2 below. This means that, under the FRR, the current senior executive remuneration presentation disclosures of Commonwealth entities are therefore consistent with the requirements for private sector organisations that are not listed companies. As the ANAO summarised at the public hearing:
what was previously required to be disclosed under what were then the finance minister’s orders back in 2013-14 … [was that] as well as putting totals of various categories of remuneration, there was disclosure of bandings of amounts of remuneration paid to executives. There would have been bandings often … and it would have shown the number of executives whose remuneration fell within those bands. As a result of changes to the finance minister’s orders, the disclosures that are now made are consistent with non-listed companies in the private sector—so what you would see, for example, in a private company or a public non-listed company. All that we see are the totals of those various classifications.
In respect of listed companies in Australia, for many years now—going back to July 2004—there were the initial changes that brought in requirements for individual key management personnel remuneration to be disclosed separately. That has gone through a number of iterations over the years, being in place initially in the corporations legislation, then in the accounting standards, and in both, and now sits within the corporations legislation. Those disclosures are made in part of the directors’ report—so under section 300A of the Corporations Act—in the remuneration report, as opposed to in the notes to the financial statements.
3.59
Finance also provided a summary of the changes to these reporting practices:
Until 2014-15, all Commonwealth entities and companies were required to report executive remuneration arrangements in their annual financial statements. This arrangement changed in 2014-15 when the Public Governance and Accountability (Financial Reporting) Rule (PGPA Rule) was introduced to align the requirements for annual financial statements (including executive remuneration disclosure) with international and Australian Accounting Standards.
3.60
In terms of the amended AASB 124 being applied in the FRR, Finance explained that:
What we do is comply with the accounting standards. We have applied the accounting standards for the purposes of executive remuneration for the financial statements. The first year of that was the reporting period last year …
accounting standards are not set by government. Accounting standards are set by an independent body, the Australian Accounting Standards Board. The Australian Accounting Standards Board issued a standard in 2013. The background to that standard is also complicated, but relevant here, because the background to that standard is that there were changes also going on in ASX listing requirements going back to prior periods. What the Australian Accounting Standards Board was doing was reflecting the fact there had been a change in the broader regulatory environment going back some years, and that the arrangements for listed companies were changing. They said that given those changes, then, for the purposes of the financial statements, which is what the accounting standards are about, the appropriate treatment in this case is the non-listed approach.
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As to what efficiencies had been gained by not reporting detailed information for senior executives by band, Finance observed that ‘these are not efficiency issues; these are accounting standards issues’:
They are about whether or not the government complies with the accounting standards set independently. The government does comply with that, and it does it in the financial statements. The purpose of the financial statements is to provide information which allows the reader to understand the financial position; it is not a broader accountability mechanism … that is an important point here: the accounting standards are about a particular document; they are not a broader accountability vehicle.
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On balance, the ANAO found that there would be ‘benefit in government considering making the aggregate level of transparency for key management personnel remuneration in the public sector consistent with that required for listed entities’. At the public hearing, the ANAO further elaborated on this finding, explaining that a ‘difference’ had emerged through changes in approach in the private sector for listed companies and in the not-for-profit sector—‘the level of transparency in the not-for-profit sector is now out of sync, and … that difference in the level of transparency may be something that could be addressed … certainly there has been more comparability between the sectors in the past and that has changed now’.
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As to what action it might take to respond to the ANAO’s finding that there would be ‘benefit in government considering making the aggregate level of transparency for key management personnel remuneration in the public sector consistent with that required for listed entities’, Finance noted this matter had been addressed for Government Business Enterprises (GBEs):
In February 2017, the Minister for Finance, Senator the Hon. Mathias Cormann, wrote to the Chairs of Government Business Enterprises (GBEs) and the Future Fund Management Agency requesting that senior executive remuneration be disclosed in a manner consistent with the requirements for ASX listed companies. All GBEs have since published details of remuneration for each of their key management personnel and Board members. The GBE guidelines, issued by the Department of Finance, are being updated to include reference to annual reporting of remuneration.
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In terms of non-corporate Commonwealth entities, Finance explained that the ‘Secretaries Board has separately been discussing ways to improve the transparency of executive remuneration within the General Government Sector and is looking to put in place revised reporting arrangements in the near future’. The Committee sought further clarification from Finance on this matter on 10 May 2017. On 31 May 2017, Finance responded that, from 16 May 2017, all Commonwealth entities had been requested to reinstate the previous practice of disclosing details of senior executive remuneration:
On 16 May 2017, the Secretary of the Department of the Prime Minister and Cabinet, Dr Martin Parkinson AC PSM, wrote to all Portfolio Secretaries requesting Departments reinstate the previous practice of disclosing executive remuneration and convey a similar request to portfolio entities and companies.
The Guidance provided with Dr Parkinson’s letter suggests that entities provide the same level of detail as provided under the previous arrangements, namely, remuneration details for all executives and other highly paid staff, within dollar ranges (or salary bands), together with the number of employees within each band.
This additional information on executive remuneration is expected to be published on each entity’s or company’s website by 31 July 2017, consistent with the previously used format, and updated annually to establish an ongoing record. This request was addressed to all Commonwealth corporate entities, Commonwealth non-corporate entities and Commonwealth companies.
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Accordingly, Finance advised that ‘no entities’ are now exempt from reporting on executive remuneration and ‘no further changes are required to restore disclosure of executive remuneration by salary band’. Finance further confirmed that guidance and templates on this matter were provided to entities, as an attachment to Dr Parkinson’s letter, to help ensure consistency of reporting.
Annual reports
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Under the PGPA Act, unless otherwise specified, Commonwealth entities are required to present their annual report (including audited financial statements) to the responsible Minister, for tabling in the Parliament, by the 15th day of the fourth month after the end of the reporting period for the entity (that is, by 15 October, for many entities).
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One issue here is whether it would be preferable that annual reports be tabled by 15 October, in time for Supplementary Budget Estimates, rather than provided to the Minister by 15 October. Important performance information contained in annual reports could then be made available to Senate Estimates Committees in a timely manner, to assist parliamentary scrutiny. As the Committee stated in its inquiry report on the Development of the Commonwealth Performance Framework, ‘bringing forward’ the delivery date for annual reports would be ‘both valuable and viable’. In Audit Report No. 33, the ANAO stated that it ‘agrees with this view’.
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The current Resource Management Guidance for Annual Reports states that ‘it has been practice for the responsible Minister to present the report to each house of the Parliament on or before 31 October. If Senate Supplementary Budget Estimates hearings are scheduled to occur before 31 October, Ministers have sought to table annual reports prior to those hearings’.
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The financial statements audited by the ANAO form part of an annual report. Accordingly, if the delivery of annual reports were to be brought forward, entity financial statements would also need to be prepared earlier and the ANAO would need to bring forward its financial statement audits. At the public hearing, the ANAO noted that ‘we would have to do some work ourselves about the allocation of time frames for the auditing work to be completed and signed’, including contracted-out audits. However, the ANAO pointed to improvements in these timeframes, and confirmed that ‘it is our goal to keep working within the sector to bring it forward’.
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Finance noted that the ‘many dependencies’ involved in bringing forward the delivery date of annual reports would require a ‘staggered approach to enable all the bits of the system to make their adjustment’:
this is not just a question of finding another date on a calendar and saying that that is the date on which everything has to be done … Some of those dependencies are in our control, in Finance, some are in the agencies control and some are in ANAO’s control … the system has to actually be able to shift in that way.
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As to whether the Reduced Disclosure Regime initiative (as discussed earlier) had as yet led to improved entity reporting times, Finance explained that:
At this stage we have not introduced it, but we hope that it will be one of the things that will go towards trying to bring forward some of these dates. Typically, if you have a small, uncomplicated agency, it just gets money in and it puts money out. You really should not be putting them through all of the hoops in order to produce a set of financial statements, which they currently go through. It might be possible to clear up some of those agencies’ accounts a lot faster, and that will be one small contribution towards the broader issue … of bringing forward and making more relevant the financial reports.
Key audit matters
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In December 2015, the Australian Auditing and Assurance Standards Board issued a suite of new and revised standards dealing with auditor reporting, including a new auditing standard, ASA 701 Communicating Key Audit Matters. Communicating key audit matters may assist users to better understand those matters of most significance in the financial statements audit. Key audit matters may relate, for example, to the highest risks of material misstatement, highly uncertain accounting estimates, or significant events or transactions during the reporting period.
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In the 2015-16 audit cycle, the ANAO conducted a limited pilot of key audit matters reporting to assess risks and inform development of its methodology. The ANAO noted that it ‘expects to report on key audit matters in the 2016-17 financial statement audit reports for a number of significant entities’.
Audit committees
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Audit committees play a key governance role in Commonwealth entities by providing independent advice and assurance. Section 17 of the PGPA Rule sets out the minimum requirements for audit committees, including that a majority of members be independent of the entity, and that its functions encompass reviewing the appropriateness of an entity’s financial reporting, performance reporting, system of risk management and system of internal control.
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During 2015-16, the ANAO considered governance arrangements for audit committees through a sample of 20 material entities. The ANAO concluded that these entities had ‘met the requirements set out in the PGPA Rule for audit committees’—in particular:
all entities had established audit committees consisting of a majority of members that were assessed by the entity to be independent—further, while appointment of an independent chair for audit committees is not a requirement of the PGPA Rule, fifteen (75 per cent) of the entities had appointed an independent chair
all entities had developed and endorsed an audit committee charter setting out the responsibilities as required by the PGPA Rule
most committees met at least four times per year, with average meeting lengths exceeding three hours
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However, the ANAO pointed to issues in the following areas:
the level to which appointment processes were standardised and documented varied amongst entities—‘appointing members with appropriate qualifications, skills and industry experience supports the effective operation of an audit committee’
of the audit committees sampled, ‘seven independent members held two or more other government entity audit committee roles, and two held memberships on at least five of the … entities’ audit committees included in the sample’
ten entities had established a sub-committee to support the audit committee in discharging its responsibility to advise on the appropriateness of the entity’s financial reporting (eight sub-committees comprised internal staff members and were chaired by an independent audit committee member, and two were chaired by a non-independent audit committee member)—‘in setting up such sub-committees, audit committee members should ensure that they are not delegating their responsibilities or independence as required under the PGPA Rule’
in two entities, on occasion, the audit committees received verbal updates on matters without supporting papers, which ‘may limit the ability of independent members to adequately prepare and consider any potential implications prior to the meeting’, and the timing of distribution of minutes for members’ review varied—‘to assist in maximising the effectiveness of the audit committee, it is important that the committee is appropriately supported by effective secretariat arrangements’
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Accordingly, the ANAO found that there is ‘now an opportunity for entities to build on the core requirements of the [PGPA] Rule and to consider how the effectiveness of audit committees could be further enhanced’.
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There was interest at the public hearing in further exploring some of the issues raised by the ANAO regarding the operation of audit committees. In terms of its finding that ‘the level to which appointment processes were standardised and documented varied amongst entities’, the ANAO further emphasised that accountable authorities ‘need access to qualified and reliable people … who are able to get across the brief and understand the business’, noting the ‘breadth of responsibilities audit committees take’. On its finding that some entities had established a sub-committee to support their audit committee, the ANAO emphasised that, while accountable authorities ‘can make the call to actually delegate through their audit committees’, it is important the ‘audit committee itself, through the subcommittee, is getting good briefing and a good understanding of the risks—and no dilution … of what is going on’. Regarding its finding about some variability in entity secretariat processes to support the work of audit committees, the ANAO noted that the ‘signal here is not to underestimate the appropriate resourcing of good governance around the audit committee to ensure it is doing its best job’.
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Overall, the ANAO observed that its findings on audit committees indicated ‘good compliance with the PGPA rules’, and the issues it had drawn attention to were ‘signals to the system to keep building on that principle of independence … people should keep building on the opportunity to get that independent advice’. As to whether the PGPA Act needed to be updated on these matters or whether ‘sending signals into the system and measuring responsiveness’ was sufficient at this point, the ANAO responded that:
the opportunity to continue to build on the solid basis of the rules that are framed in section 17 of the PGPA remains there … the signal is that people should be actively thinking about it as an opportunity to gain good risk management advice and good independent advice … … … Our purpose in raising these things is to signal risks and issues to others. Certainly the process of finding suitability qualified people for the variety of businesses that there are in the Commonwealth is a key one. Having time to prepare is a key issue. If you find an audit committee member on multiple audit committees, you might see a risk around preparation and ability to get across the business. So they are signals.
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Finance commented that ‘we are always interested in how we improve audit committees … A good thing to look at in the independent review of the PGPA … would be to step back and see whether we have got it in the right place’.
Financial sustainability
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An analysis of the factors that influence a Commonwealth entity’s financial sustainability can provide an indication of financial management issues or point to an increased risk that entities may require additional government funding. The ANAO noted that, ‘in the absence of a public sector framework detailing appropriate measures’, it had ‘developed parameters based on generally accepted concepts of financial sustainability and applied these to the operating results and balance sheets of the 66 material entities’.
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Turning first to operating results, a key measure of an entity’s financial management is its operating result for the year. A history of large deficits or surpluses in a not-for-profit entity could suggest the need for additional or refocused funding, elimination of non-value adding costs and/or improved financial management. Similarly, a large deficit in a for-profit entity (or one with quasi-commercial operations) should be considered more closely.
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Against this background, the ANAO analysed the operating results of the 66 material entities over a five year period (2011-12 to 2015-16). The ANAO grouped these entities into three operating result categories, as follows:
large deficits—where an entity’s average deficit for the past five years is greater than one per cent of total expenses
two not-for-profit entities had large deficits: Comcare and the High Court of Australia
two for-profit entities had large deficits: Moorebank Intermodal Co Ltd and the National Broadband Network
small deficits or surpluses—where an entity’s average deficit or surplus for the past five years is less than one per cent of total expenses
30 not-for-profit entities had small deficits or surpluses
large surpluses—where an entity’s average surplus for the past five years is greater than one per cent of total expenses
16 for-profit entities had large surpluses
16 not-for-profit entities had large surpluses
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The ANAO explained that the large surpluses for the 16 not-for-profits were mostly due to ‘accounting treatment and recognition processes’, including machinery-of-government changes over the year and that some of the cultural institutions had received gifted assets.
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There was interest at the public hearing in the two for-profits and two not-for-profits that had large deficits. The ANAO confirmed that both for-profit entities were ‘largely in a start-up phase of their programs’, it was ‘quite normal to see an incurring of deficits during that period’ and there is an ‘expectation that that will plateau out in the coming periods’. In terms of the two not-for-profit entities, in more recent years Comcare had returned to an average surplus and the High Court’s operating results had improved to reflect an average loss of less than one per cent.
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As to how the Comcare deficit arose, the ANAO further explained that:
in Commonwealth entities there are a number of financial statement items that are subject to judgement and estimation processes. Comcare is one of these entities where assessments need to be made about the outstanding claims … and there are judgements and assumptions made against that. In 2011-12 there was a change in the approach to it and a change in the accounting policy. That resulted in an adjustment to the outstanding claims and liability which flowed through to an expense in the profit-and-loss statement that gave them a significant deficit in that year.
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The ANAO provided further information on the changes to Comcare’s accounting policy, and also details of Comcare’s disclosure on this matter in its 2011-12 financial statements.
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Turning next to balance sheets, the ANAO analysed the balance sheet positions of the 66 material entities as at 30 June 2016. Two measures are generally accepted indicators of the soundness of entity balance sheets:
liquidity (extent to which an entity’s liabilities are covered by cash or other financial assets)—an entity with liabilities that significantly exceed financial assets may need a future injection of cash from government to meet those liabilities
gearing (extent to which an entity’s total assets are funded by debt rather than equity)—an entity with high gearing may be running down its asset base and that could indicate the need for a future capital injection from government
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The ANAO grouped these entities into three balance sheet categories, as follows:
strong (entities where financial assets were at least 50 per cent of total liabilities and equity was at least 25 per cent of total assets)
79 per cent of entities had strong balance sheets in 2015-16, the highest level in the past four financial years
less strong (entities where financial assets were less than 50 per cent of liabilities or where equity was less than 25 per cent of total assets)
15 per cent of entities had less strong balance sheets in 2015-26
Weak (entities where financial assets were less than 50 per cent of liabilities and where equity was less than 25 per cent of total assets), with three entities consistently appearing in this category for the past four years: the Australian Bureau of Statistics, the ATO and the Department of the Environment and Energy.
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In terms of the three entities (as listed above) with weak balance sheets, the ANAO explained this had resulted from ‘specific instances that had occurred during the period’, and that the three entities had been in this position for a number of years but were ‘improving each year’.
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Overall, the ANAO concluded that the ‘financial sustainability of the majority of these entities was not at risk’. However, it found that there would be ‘benefit in the Government developing performance targets or benchmarks to enable entities to assess their own financial sustainability against agreed parameters over time and against like entities’.
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As to the benefits of introducing such performance targets or benchmarks, the ANAO explained this would provide entities with a ‘sense of health and risk around various parameters for running the business and also for benchmarking against comparable types of business’:
Some businesses have large appropriation revenue. Some businesses are cost recovered. There are profit and not-for-profit. Being able to look at good investment and planning decisions for others is where we are getting to in this in the private sector, with the kinds of indicators and parameters that are available for CFOs and CEOs to look at. We just do not have something comparable in the public sector.
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As to what actions might be underway in response to the Auditor-General’s findings regarding financial sustainability benchmarks, Finance responded that there is ‘value in metrics to help understand where an agency is at in its sustainability’ but a need to use the ‘right kind’ of indicators:
In many ways the advice we provide the government involves judgements and information that goes to sustainability … coming up with the right metrics and the right indicators in an environment where you are not commercial is the tricky part. So we are actively engaged in looking at current ratios and all sorts of other ratios in order to help form our views about the sustainability of an entity. We will keep doing that.
We would be slightly different in the practice of that to the ANAO. The ANAO has published indicators for a couple of years now … we are wanting to be a little bit more confident that the right kind of indicators are being used or that the interpretation of those things is going to be robust rather than simply saying, ‘Here are the indicators.’ So in one sense we have been looking for a number of years at the indicators that the ANAO has looked out and we are asking ourselves the question, ‘Are they the right kind of sustainability indicators, or are there some other ones for people to explore?’ That is what we do.
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As to the timing of such work, Finance noted that ‘there is no particular time frame attached to it’:
Finance’s ongoing role is one where we engage with these things. If from time to time we think there is something useful that has come out of that we will draw on it. But we do not have a plan or a time frame to say, ‘By X date there will be six indicators which will apply to everything and they will be publicly reported,’ because we do not have that.
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The ANAO further added that ‘we like to think these are useful, at least to the parliament, because they give a lens on how agencies are going for different reasons. We will continue to do what we do and work with Finance to see if there is a set that emerge that are ongoing’.
16 August 2017