Finance and Public Administration Legislation Committee
Report on 1997-98 Annual Reports: Report Two
Table of Contents
Chapter 2 – Annual reporting requirements
Introduction
In 1988, the committee commenced an inquiry into annual reporting, an
inquiry culminating in the tabling ten years ago in June 1989 of a landmark
report entitled The Timeliness and Quality of Annual Reports. That
report noted a steady improvement in the reporting process but criticised
the frequent lack of timely reporting, the overlap with the Explanatory
Notes, non-compliance with the reporting guidelines and the lack of
systematic scrutiny of reports. Many changes have occurred since that
time: the annual reporting requirements have been revised on several occasions;
the financial reporting regime has changed with the introduction of accrual
budgeting and an outputs and outcomes reporting framework; the powers
of departmental secretaries have been significantly enhanced; and the
communications framework has been radically altered with the growth of
the Internet. In light of the current review by the Department of the
Prime Minister and Cabinet of the departmental reporting requirements,
the committee thought it timely to revisit the issue of annual reporting
and to reconsider the qualities it believes make for excellence in such
reporting.
Purpose of annual reports
In its 1989 report, the committee reviewed the history of annual reporting
in this country, noting in particular the input of the Coombs inquiry
into government administration:
The annual report should be a vehicle by which departments furnish an
account of their activity and performance in terms of ministerially approved
goals and objectives. It should provide background information that is
necessary for an understanding by Parliament and the public of the department's
annual expenditure and forward estimates. [1]
The committee itself determined that the central purpose of annual reporting
was accountability, exercised through the tabling of annual reports in
Parliament, and that the needs of any audience other than the Parliament
had to be of secondary consideration to those of the Parliament. [2] The present committee sees no reason to diverge
from this view. The Parliament appropriates the moneys which are expended
by departments and agencies according to the priorities of the government
of the day; ergo, the heads of departments and agencies must account through
their minister to the Parliament for their stewardship. The annual report,
in tandem with the Portfolio Budget Statement, is the most appropriate
vehicle through which that accountability is achieved.
That said, the present committee recognises that annual reports have
subsidiary purposes. They are useful reference documents which provide
an outline of the organisational structure of the department or agency,
its objectives, and an overview of activity in the year under review.
As such, they are used by the media, researchers, members of community
groups and others as, often, their first source of general information
about the agency or one of its activities. In some cases, annual reports
are also an integral part of the agency's internal management planning.
In the case of market-oriented agencies, annual reports may also take
on a public relations role.
This diversity of functions not infrequently translates into a lengthy
annual report which attempts to be all things to all possible readers.
With the increasing accessibility of information via electronic means,
it should be possible for agencies to identify and for the reporting requirements
to recognise certain categories of information which are better suited
to other forms of reporting than hard copy annual reports.
Timeliness of reporting
A major concern of the committee over the years has been the timeliness
of reporting. [3] Without timeliness, information
loses much of its relevance as an accountability tool and its value in
providing input to decision making or scrutiny is lessened. Recent changes
to the guidelines to require the tabling of departmental annual reports
by 31 October following the year under review are commendable and, the
committee notes, are generally adhered to. The reports, and the finalised
performance information for the year under review that they contain, are
thus available for consideration by Senate committees considering the
Appropriation Bills Nos. 3 and 4 in the additional estimates hearings.
While the timely tabling of annual reports is no longer the issue it
once was, the timeliness of the information contained remains a matter
of concern. Performance against indicators outlined in a Portfolio Budget
Statement (PBS) in May of one year are finally reported on in September
or October, some 16 to 17 months after their initial publication. Indicators
which, on critical inspection, are deemed to be inappropriate for whatever
reason remain the performance measure that is reported on, even though
they might have been changed in the intervening PBS. Similarly changes
to the outputs and outcomes framework from one PBS to the next will result
in outdated performance information in the annual report and potential
confusion on the part of users of both documents, unless and even if copious
explanations are included. It is desirable that parliamentary scrutiny
committees are able to scrutinise as much actual performance against targets
or other indicators as possible before they are required to approve the
next round of appropriations – a matter the committee will be addressing
in its forthcoming report on the PBS.
The artificiality of a 12-month timeframe
An annual report is a useful discipline for any agency, providing as
it does a structured assessment of progress or scorecard for the year
under review. But the question of how rigidly the twelve-month timeframe
should be adhered to inevitably arises. While the bulk of the report must
be devoted to the review year, common sense dictates that a major event
occurring two days after the reporting period should be mentioned. Similarly,
major events planned for in the coming year require some coverage. Perhaps
a more difficult judgment relates to matters from previous years. To what
extent should an annual report compare present performance with that of
previous years? In the committee's view, trend information is a vital
part of any performance assessment and is particularly helpful when graphically
presented. The committee has previously commended the Australian National
Audit Office for the clarity of its bar charts presenting performance
trends over the past three to four years for the number of audits published,
numbers tabled according to schedule, level of agreement with recommendations
and so forth. Any agency whose performance lends itself to numerical analysis
would do well to follow suit.
General content issues
Annual reports versus other reporting
In considering the required content of an annual report, the committee
is mindful of a variety of other sources of annual-reporting type information
and, in particular, the growing number of whole-of-government reports.
From a parliamentary perspective, whole-of-government reporting on specific
issues is a most welcome practice. In particular, the committee has considered
the State of the Service series from the Public Service and Merit Protection
Commission and the Attorney-General's Department reports on the operation
of the Freedom of Information (FOI) Act. While whole-of-government reporting
should not supplant entirely individual reporting on such themes, the
consolidation of information across all agencies, provided that it is
done in a timely fashion, provides a useful vehicle to assist senators
and members gain a broad picture of the issue. The committee considers
that such across-the-service compilations could be extended to many of
the matters legislatively required to be reported on, including industrial
democracy, occupational health and safety, and advertising and market
research. Other issues such as social justice, environmental impacts,
service charters, and business regulation might well be candidates for
consolidated reporting.
If a comprehensive whole-of-government report is prepared on a given
theme, the requirement for highly detailed coverage in individual annual
reports is weakened. The committee would not be averse to leaving the
extent of coverage to the discretion of the individual department or agency,
which should provide quite detailed coverage in a year in which FOI, for
example, became a particular issue but equally could provide minimal coverage
in other years. And if, in this era of decentralised operations, whole-of-government
reporting by an executive department on a given theme were deemed to be
inappropriate, an acceptable alternative might be an annual review by
an independent agent such as the Auditor-General.
Despite the fact that a stand-alone comprehensive annual report is convenient
to use, the committee accepts that beyond a certain size, such a document
becomes unwieldy. Much required information could well be placed instead
on the agency's web site and maintained there for an agreed period, with
appropriate arrangements made for the archival record. To the committee,
the most important issue is that certain information is published, and
published in a timely fashion – whether it is published on a web
site or in an annual report is less important, provided that the links
are transparent. In the case of market research or consultancies, for
example, an entry on the web site which registered details as they became
available would be of far greater use than a printed record of the fact
16 months later. The annual report could merely record the quantum of
consultancies and total cost for the year in review, with a link to the
full electronic detail. As more and more users access annual reports electronically
in the first place, this will become an increasingly logical step.
While accepting the logic of the premise that the emphasis in annual
reporting should be on whether the agency's objectives have been achieved,
and at what cost, senators and members have legitimate concerns about
the processes used to achieve those objectives. Hence reporting on matters
where probity or political patronage is an issue will always be of interest.
Consultancies, discretionary grants, board membership, major contracts,
significant appointments are a few examples. Rather than setting rigid,
across-the-board rules for such matters in annual reports, the committee
would prefer to see a requirement that such information be placed on the
agency's web site on an ongoing basis, with the address signalled in the
annual report. Thus the information could be accessed in a more timely
fashion, leaving the annual report to record the more significant details
and consolidated or trend information, at the chief executive's discretion.
The former on-request information
The current reporting requirements refer to the government decision to
streamline annual reports. Much of the `on-request' material, such as
details of non-statutory bodies and companies, has been removed. The rationale
for this decision was as follows:
This streamlining recognises both the low level of interest in most of
the material previously in Attachment 3 and the significant resources
expended by agencies in its preparation, and is balanced by the development
of whole of government reporting ... [4]
As the instigator of the requirement that much of this material be published
in the annual report, the committee questions the `low level of interest'
and suspects that many potentially interested persons were simply deterred
by the cumbersome request process or, in the case of the committee, had
developed a jaundiced view as to the accuracy of the material. Be that
as it may, the committee takes exception to the statement `significant
resources expended by agencies in its preparation'. To its certain knowledge,
one such agency took a risk-management approach and failed to collect
the material, arguing that were it required to do so, it would throw the
necessary resources at the `problem' when required.
The committee is nevertheless delighted to read the quid pro quo, namely
whole of government reporting. In fact, it would go so far as to say,
on the matters particularly dear to the committee's heart – namely
a consolidated detailed list of statutory authorities, non-statutory bodies
and government companies – that the government need not report on
it at all, but merely require the Department of the Prime Minister and
Cabinet to establish a web site, linked to each agency's home page, and,
in the spirit of devolution, require each agency to provide the relevant
detail with, for each body so listed, the date last amended. The committee
engages to cooperate with the department on the question of the required
level of detail.
Performance information
Part of the rationale for the change to accrual budgeting was to provide
greater transparency to the government's financial position by demonstrating
clearly what was being produced, for what purpose and at what cost. Accrual
budgeting and the associated documentation changes would, it was suggested,
facilitate a `clear read' from the Appropriation Bills to the PBS to the
annual report. The theory is commendable and the committee will be interested
to observe the practice in the 1999-2000 annual reports which will be
the first in which reporting is specifically required against the performance
indicators outlined in the 1999-2000 PBS. The committee will consider
the quality of those indicators in its forthcoming report on the PBS.
Clearly, reporting on the agency's performance should be a central component
of any annual report. But this should not be confused, as it so often
appears to be, with reporting on the agency's activities. A degree of
narrative activity reporting is warranted for the sake of readability
and for the historic record but should be additional to, not in place
of, reporting on what the agency achieved. As a simplistic example, a
business development program should report on the number of businesses
developed, with trend information on the number still viable in successive
years. The committee is not wedded to target setting, at least in the
first instance, as it can be too readily manipulated by the setting of
unrealistically low targets to produce excessively favourable results.
After two or more years' experience with an activity, a realistic achievement
target could perhaps be set and reported on.
To be of value, performance reporting must be at an appropriate level.
Materiality is one issue to be considered here, but not the only one.
If an outcome of modest budgetary demands nevertheless encompasses very
diverse activities, it could be argued that output reporting should be
quite specific. Equally, if an outcome depends on input from a number
of separate statutory agencies, the full picture of achievement will not
be presented in any annual report. Another issue that concerns the committee
generally is whether the reporting on outputs will build up to a complete
picture of the outcome, or whether only the obvious, measurable outputs
will be reported on. And will the outputs/outcomes structures remain stable
enough, year on year, to produce comparable data, or will so many changes
occur as to render the reporting of limited value?
Of chief importance to the committee is that performance is reported
on frankly and fully. It does not want to see inadequate performance glossed
over with excuses that information proved impossible to collect, was shown
to be not valid, or the parameters changed in the course of the year.
The mark of a good report is candour. As the most recent IPAA awards indicated,
`[d]epartments risk compromising their reputations if awkward or embarrassing
issues are covered up or buried in the fine print'. [5]
The committee notes that the Western Australian Auditor-General is required
to conduct annual audits of agencies' key efficiency and effectiveness
indicators, in order to form an opinion on the extent to which they are
relevant to the agencies' stated objectives, are appropriate for assisting
external users assess the agencies' performance, and fairly represent
agencies' performance. In the committee's view, there may be merit in
requesting the federal Auditor-General to conduct a similar annual audit.
Staffing information
If one accepts that a more businesslike public sector should focus on
the results the government wants to achieve for the community, outcomes
such as a lower crime rate, for example, and the outputs leading to those
outcomes, it could be argued that staffing information is but one of the
cost factors to be considered. Staffing information tends to play a minor
role in the majority of private sector annual reports but has traditionally
received much prominence in those of the public sector. The current (May
1999) requirement is for an overview of the agency's staffing level and
associated expenditure to be provided in an appendix. Data are required
on the total number of employees, disaggregated by classification and
location; numbers of full-time, part-time and temporary staff; numbers
of staff employed under the Public Service Act 1922; gender breakdown
of staff; SES by gender, level, gains and losses and intra-agency mobility.
The committee notes that a particular interest of senators, as evinced
in estimates hearings, is changes to staffing arrangements. When there
has been extensive outsourcing or major changes to the overall numbers,
classification levels or locations of staff, detailed reporting is of
interest. So too is the pattern of staff usage over the years per discrete
activity. Such information is currently provided in the PBS per outcome
only, a level which might prove too aggregated for some senators.
The committee is currently also inquiring into the format of the Portfolio
Budget Statements. In the context of that inquiry, it will be considering
issues germane also to annual reporting, including staffing information.
Other content
The committee believes that the standard categories of information should
be maintained. Common sense dictates that an annual report should contain
an overview by the chief executive of significant events in the year under
review; it should briefly outline the objectives of the organisation,
its organisational structure and means of corporate governance. It should
provide detail of any form of external scrutiny, such as court or tribunal
decisions impacting on the agency, and audit or Ombudsman reports, along
with the agency's responses. The actual structure of the report, however,
should not be prescribed but left to the judgment of the chief executive.
Such previously required content as compliance checklists, if ever they
were appropriate, are no longer.
Financial statements
While the committee is fully supportive of the move to accrual budgeting
in an outcome/outputs reporting framework, it also recognises that the
resulting financial statements may initially at least cause confusion
to the uninitiated. The full cost of outputs, including such factors as
depreciation, employee leave entitlements, and a return on equity provided
by the government, represents a truer picture of the government's financial
position and the real costs of its activities compared with cash-based
budgeting. But in this transitional period, agencies would do well to
consider presenting their financial outcomes in a user-friendly format,
perhaps incorporating a meaningful narrative summary of the financial
statements and providing where possible trend analyses and using graphics
to illustrate the situation.
Many users of agencies' financial statements are familiar with private
sector profit and loss statements, the handling of assets and liabilities,
capital injections and so forth. But while the broad terrain is familiar
to some, public sector accounting has major differences which can lead
to misunderstandings. The Commonwealth has a high level (over 70 per cent)
of `administered' expenses which are beyond the control of the administering
agency: pension payments and transfer payments to the States, for example.
The take-up rate for certain social welfare payments can be hard to predict
and this inevitably impacts on the cost of administering the payments.
No agency which had the potential to look less efficient in a benchmarking
exercise than its fellows would want to pass up the chance of explaining
such apparent anomalies.
The introduction of specific private sector accounting concepts has also
caused a degree of confusion. In particular, the notion of accounting
for the cost of capital is not a feature of many public sector jurisdictions.
The committee believes that a narrative explanation of the capital user
charge and its quantum may be required in annual reports until such time
as it becomes routine or ceases to be used differentially.
The non-appearance of the familiar `corporate services' entry in the
first accrual PBS also had a few users perplexed. In the committee's view,
the method used to allocate overheads or support service costs to outputs
should be disclosed in annual reports. Even if the materiality of those
costs is insignificant, or the garnering of more accurate data would be
cost-ineffective, the method of allocating costs to outputs should be
transparent.
It has been suggested that annual reports should not be `accounting'
documents. The committee holds the view that there should be no attempt
to downplay the importance of the accounting aspect of annual reports
but that every effort should be made to integrate the financial information
with other aspects of the report. All too often the financial statements
are clearly the work of different hands, are unindexed, use different
terminology to the body of the report and apparently do not feed in to
the management of the agency. The committee would like to see this trend
reversed.
Presentational standards
Most annual reports reviewed by this committee have been appropriately
modest. The committee believes that presentational issues could well be
left to the judgment of the relevant chief executive, rather than being
prescribed. In light of the stated government policy that all reports
must be available electronically by 2001, the committee takes more interest
in the accessibility and useability of on-line versions. Again it believes
that devolved responsibility for the level of presentation is appropriate
here. It encourages the Institute of Public Administration Australia (ACT
Branch) (IPAA) to consider a special annual reports award for the most
user-friendly electronic report.
Parliamentary review
If Parliament is the principal audience for annual reports, it is reasonable
to question what use Parliament makes of annual reports. Of course, much
parliamentary use of annual reports may go undetected. The fact that a
given report does not attract comment or debate in either chamber or in
estimates hearings may merely reflect the fact that, after scrutiny, it
provides no grounds for concern. In this committee's experience, of the
1997-98 reports it reviewed, only four of 35 were specifically referred
to in the Senate, two by two speakers: two reports received both positive
and negative comment, one received only positive comment and one received
neutral comment.
Annual reports creators however have a legitimate expectation of thoughtful
feedback on their efforts from their intended audience. The committee
well recalls the comments of a former departmental secretary on this matter:
Each department must submit an annual report to parliament. I signed
off eleven during my career. Given some of the pseudo indignation about
departments not providing information about their activities I mention
that I never got any parliamentary feedback on any one of those annual
reports. [6]
To counter this situation, a Senate order has for many years now required
committees to report on annual reports referred to them. [7]
Not all committees regard this as a high priority exercise, but it does
ensure a modicum of scrutiny. Committees can and do hold hearings into
annual reports and may consider annual reports of departments and budget-related
agencies in conjunction with their examination of the agency's estimates.
The committee also understands that, increasingly, agencies are approaching
their parliamentary scrutiny committee to discuss reporting issues. Additional
scrutiny is provided by IPAA, which has been conducting its annual report
awards for sixteen years now and endeavours to enlist parliamentarians
amongst its judges. While this overall scrutiny record is by no means
perfect, it is certainly an improvement on the past.
Maintenance of annual reporting requirements
The current departmental reporting requirements are coordinated by the
Department of the Prime Minister and Cabinet, with the Department of Finance
and Administration establishing the requirements for the financial statements.
Revised reporting requirements are provided to the Joint Committee of
Public Accounts and Audit for its imprimata. The committee believes this
arrangement is satisfactory. It would, however, prefer to see established
a routine biennial review of the requirements at a predictable time, with
all input and the final recommendations published on the PM&C web
site, along with `best practice' examples.
Conclusions
Annual reports have been described as the documents which close the loop
in the accountability framework started with the PBS. In future years
in its reports on annual reports, the committee will consider the linkages
between the two sets of documents closely and will look particularly at
the quality of the performance reporting.
Footnotes
[1] Coombs, HC, Royal Commission on Australian
Government Administration, Canberra: AGPS, 1976, p. 75.
[2] Senate Finance and Public Administration
Committee, The Timeliness and Quality of Annual Reports, Canberra:
AGPS, 1989, p. 6.
[3] See, for example, The Timeliness and
Quality of Annual Reports, pp. 26-34.
[4] Department of the Prime Minister and Cabinet,
Requirements for Departmental Annual Reports, 1999.
[5] Institute of Public Administration Australia
(ACT Division), Report of Judges on the 1997-98 Annual Reports of Commonwealth
Departments and Statutory Business Undertakings, 1999, p. 8.
[6] Sir William Cole, as quoted in Senate Finance
and Public Administration Committee, The Timeliness and Quality of
Annual Reports, Canberra: AGPS, 1989, p. 40.
[7] The current requirement can be found in
Standing Orders and Other Orders of the Senate, February 1999,
order 25(21).
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