2.1
The Joint Committee of Public Accounts and Audit (JCPAA) inquiry into the Commonwealth financial statements was based on Audit Report No. 33 (2016-17), Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2016. Audit Report No. 33 provides the results of the final audits of the Consolidated Financial Statements (CFS) and the financial statements of all Commonwealth entities.
2.2
The Committee commends the Australian National Audit Office (ANAO) for its work each year in auditing the CFS and entity financial statements, and also reviewing the progress of each entity in addressing any significant and moderate findings from the previous year’s audit. The Committee further commends the ANAO for its work in reviewing the effectiveness of public sector reporting frameworks and developing financial sustainability benchmarks. The ANAO’s audits of the financial statements play a critical role in ensuring accountability to the Parliament and the Australian public for the expenditure of public funds.
Consolidated Financial Statements: audit findings
2.3
The Committee notes that the 2015-16 CFS, prepared in accordance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the requirements of Australian Accounting Standards, was signed by the Minister for Finance on 27 November 2016, and that an unmodified auditor’s report was issued on 28 November 2016.
2.4
The Committee understands that, as required under the Commonwealth Procurement Rules (CPRs), information on Commonwealth contracts, contractors and consultancies is available from AusTender, as well as in Commonwealth entity annual reports and financial statements, as required under the PGPA Rule 2014 and PGPA Financial Reporting Rule 2015. The Committee emphasises that these reporting mechanisms—as well as the accompanying accounting standards and rules—must ensure the accountability needs of the Parliament and the Australian public continue to be met as regards reporting on contracts, contractors and consultancies.
2.5
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. The Committee will propose that reporting on contracts and consultancies under the annual report provisions of the PGPA Rule and the PGPA Financial Reporting Rule 2015 be considered by the review panel, noting that the review is not examining the CPRs. (The Committee makes a recommendation related to this matter below.)
Financial statements: audit findings by portfolio
2.6
The Committee notes that the Auditor-General issued auditor’s reports on the 2015-16 financial statements of Commonwealth 246 entities, up until 9 December 2016, and that all auditor’s reports were unmodified.
2.7
The Committee also notes that 245 findings were reported to entities as a result of the ANAO audits, comprising four significant, 32 moderate and 209 minor findings.
2.8
The four significant audit findings were for the Department of Education and Training, the Administration of Norfolk Island and the National Disability Insurance Agency (NDIA). The Committee acknowledges the progress reported by these agencies in addressing the significant audit findings, and understands that the ANAO will continue to assess the effectiveness of progress by the department and the NDIA on these matters as part of its 2016-17 financial statements audit. The Committee looks for marked improvement from these agencies in future audits.
2.9
The Committee had a particular interest in the significant audit finding for the NDIA concerning the assurance framework and compliance program for the National Disability Insurance Scheme (NDIS). Self-management is a critical component of the NDIS, and the Committee emphasises the need for the NDIA’s compliance regime to support implementation of the scheme’s policy intent in this regard.
2.10
The Committee recommends that, should the Australian National Audit Office audits of the financial statements of the National Disability Insurance Agency and the Department of Education and Training for the period ended 30 June 2017 result in any significant audit findings, whether new or unresolved from 2015-16, these entities promptly report back to the Committee on progress in responding to such findings, including actions taken on this matter by the entity’s audit committee.
2.11
In terms of the ANAO’s 32 moderate audit findings, the Committee was particularly concerned to examine those agencies with multiple moderate findings—in this case, with the Department of Defence and the Australian Taxation Office (ATO) each having four moderate audit findings.
2.12
The Committee acknowledges the progress reported by these agencies in addressing the moderate audit findings, and understands that the ANAO will continue to assess the effectiveness of progress on these matters as part of its 2016-17 financial statements audit. The Committee looks for marked improvement from these agencies in future audits.
2.13
The Committee had a particular interest in the moderate audit finding for the ATO concerning the estimation and allocation processes for revenue and expenses, given the critical importance of this function and as the ATO has had audit findings in this area in previous years. The Committee notes that, while an agency could be managing resourcing risks in terms of such audit findings, the ATO confirmed the ‘branch responsible for preparing the administered revenue and expense estimates has maintained continuity in resources’.
2.14
The Committee recommends that, should the Australian National Audit Office audits of the financial statements of the Australian Taxation Office and the Department of Defence for the period ended 30 June 2017 result in any significant or moderate audit findings, whether new or unresolved from 2015-16, these entities promptly report back to the Committee on progress in responding to such findings.
2.15
The Committee notes that two significant legislative breaches were reported to the Northern Land Council during 2015-16, including an unresolved significant legislative breach from previous audits. The Committee looks for marked improvement from the Council in future audits as regards this matter.
2.16
The Committee recommends that:
the Northern Land Council report back to the Committee on progress in responding to the two significant legislative breaches reported by the Australian National Audit Office (ANAO) in Audit Report No. 33 (2016-17), including actions taken on this matter by the Council’s audit committee
should the ANAO audit of the financial statements of the Council for the period ended 30 June 2017 result in any significant legislative breaches being reported, whether new or unresolved from 2015-16, the Council promptly report back to the Committee on progress in responding to such findings
Financial statements: audit findings by category
2.17
The Committee notes that 75 per cent of significant and moderate findings reported to Commonwealth entities as a result of the ANAO’s financial statement audits were in the following categories: IT control environment; compliance and quality assurance frameworks; and accounting and control of non-financial assets. The Committee will be particularly interested to monitor entity progress in addressing audit findings across these categories in future ANAO financial statement audits.
Improving financial reporting and disclosure
Financial reporting requirements for executive remuneration and RDR
2.18
The Department of Finance (Finance) is continuing to work towards the implementation of a Reduced Disclosure Regime (RDR) under Australian Accounting Standards in future reporting periods. The Committee supports initiatives that make financial statements easier to read and generate more timely annual reporting but only to the extent that the accountability needs of the Parliament continue to be met. The Committee emphasises that Finance should ensure implementation of the RDR meets the accountability needs of the Parliament, and that this may warrant additional requirements for disclosures over and above external accounting standards.
2.19
In particular, the Committee is concerned that the requirement to disclose 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, was removed as a result of changes in 2015 to align the new PGPA Financial Reporting Rule with externally determined international and Australian Accounting Standards. While acknowledging the need to comply with accounting standards (as set by an independent body), the Committee again emphasises the need to ensure that the accountability needs of the Parliament, and the general public, continue to be met.
2.20
In this context, the Committee acknowledged some moves to reinstate the previous practice of requiring all Commonwealth entities to disclose senior executive remuneration—that is, to provide at least the same level of detail as under previous arrangements.
2.21
However, the Committee has some concerns about the mechanisms used to reinstate the previous practice of disclosing senior executive remuneration:
The Minister for Finance wrote to the Chairs of Government Business Enterprises (GBEs) and the Future Fund Management Agency in February 2017 requesting that senior executive remuneration be disclosed in a manner consistent with listed companies—and advice that the GBE guidelines will be updated is noted by the Committee.
Entities have been requested, through Secretary correspondence and guidance, to reinstate the previous practice—however, this is only optional by request rather than a formal requirement, which had been the previous practice.
This information is to be published on entities’ websites and updated annually—but not published in entity annual reports, consistent with previous practice.
There may be issues with consistency across entities in terms of the website publication of this information, as well as with transparency and accessibility.
The Committee has not received details of how the PGPA Rules and Resource Management Guides will be amended to reflect this change.
2.22
The ANAO stated 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’. The Committee recommends that Finance consider the requirements for listed entities and provide advice as to options to further strengthen remuneration disclosure requirements.
2.23
The Committee maintains that, consistent with previous practice and to ensure maximum transparency and accountability, disclosure of senior executive remuneration should be a formal requirement, not optional by request—with this requirement duly reflected in the relevant legislation and guidance, and the relevant disclosure published in entity annual reports rather than on entity websites. Further, the ‘Guide’ to section 27, ‘Senior management personnel remuneration’, of the PGPA Financial Reporting Rule needs to be updated to reflect the now reinstated previous practice.
2.24
The Committee recommends that the Department of Finance, consistent with previous practice:
re-establish a formal requirement for disclosure of senior executive remuneration by Commonwealth entities (including, without limitation, Government Business Enterprises), with this requirement to be duly reflected in the relevant legislation and guidance
ensure that the relevant disclosure is published in entity annual reports
2.25
In terms of the reinstated disclosure of senior executive remuneration by Commonwealth entities (including, without limitation, Government Business Enterprises), the Committee recommends that the Department of Finance report back to the Committee on:
how and when this information might be published in entity annual reports, consistent with previous practice
options to further strengthen remuneration disclosure requirements, giving particular consideration to the requirements for ASX listed entities and/or the practice of the ASX
what formal guidance and/or legislative instruments have been or need to be updated to reflect such changes
how and when it will update the PGPA Rule 2014 and PGPA Financial Reporting Rule 2015 on this matter, including the ‘Guide’ to section 27 ‘Senior management personnel remuneration’
how and when it will update the relevant Resource Management Guidance and Government Business Enterprise guidelines as regards this matter
Annual Reports
2.26
In JCPAA Report 457, the Committee observed that bringing forward the delivery of Commonwealth entity annual reports would be both valuable and viable. The Committee notes ANAO agreement with this view, and the ANAO’s confirmation that it will continue to work with entities to promote earlier completion of financial statements audits.
2.27
The key issue here is a preference that annual reports be tabled by 15 October, in time for Supplementary Budget Estimates, rather than provided to the Minister by 15 October. The Committee will propose that this matter be considered by the independent panel conducting the review of the operation of the PGPA Act and Rules. (The Committee makes a recommendation related to this matter below.)
Key audit matters
2.28
The Committee notes that the ANAO expects to report on key audit matters in its 2016-17 financial statements audit report, reflecting new auditing standards issued by the Australian Auditing and Assurance Standards Board. The Committee will be interested in the key matters covered by this new audit focus.
Audit committees
2.29
The Committee notes the ANAO’s finding (from a sample of 20 Commonwealth entities) that, in establishing their audit committee, all entities had implemented the requirements of the PGPA Rule.
2.30
However, the Committee points to a number of other issues with entity audit committees identified by the ANAO, such as the need to standardise member appointment processes, source suitability qualified members and implement appropriate resourcing of secretariat arrangements to maximise the effectiveness of audit committees. There is also a need to manage risks around the establishment of sub-committees to support audit committees and independent members holding membership on multiple audit committees.
2.31
The Committee supports the ANAO finding that there is now an opportunity for entities to build on the core requirements of the PGPA Rule and further enhance the effectiveness of audit committees—in particular, by focusing on the audit committee’s role in providing independent risk management advice.
2.32
The Committee will propose that this matter be considered by the independent panel conducting the review of the operation of the PGPA Act and Rules.
2.33
The Committee recommends that the Department of Finance note the Committee proposes the following matters be considered as part of the independent review of the Public Governance, Performance and Accountability Act 2013 (PGPA Act):
reporting on contracts, contractors and consultancies under the annual report provisions of the PGPA Rule 2014 and the PGPA Financial Reporting Rule 2015
bringing forward the delivery and publication of Commonwealth entity annual reports
further enhancing the effectiveness of entity audit committees
Financial sustainability
2.34
The Committee commends the ANAO for its work in developing financial sustainability benchmarks to assess the operating results and balance sheets of Commonwealth entities. The Committee notes the ANAO’s overall conclusion that the financial sustainability of the majority of the entities assessed was not at risk.
2.35
The Committee supports the ANAO’s finding that there would be benefit in the Government developing publicly reported performance targets or benchmarks to enable entities to assess their own financial sustainability against agreed parameters over time and against like entities—acknowledging Finance’s existing work in this area. The Committee emphasises the importance of developing appropriate and robust indicators or metrics in this regard, and the need to establish a timeframe for the establishment of such benchmarks.
2.36
The Committee recommends that the Department of Finance, in consultation with the Australian National Audit Office, work to:
develop appropriate and robust performance targets or benchmarks, which can be publicly reported, to enable Commonwealth entities to assess their own financial sustainability against agreed parameters over time and against like entities
provide the Committee with a timeline and milestones for implementation of this initiative