Chapter 2 The Commonwealth Financial Framework
2.1
As outlined in the Explanatory Memorandum of the Public Performance,
Governance and Accountability Bill 2013, the Commonwealth financial framework
underpins the use of money and resources within the Australian Government, and is
an important feature of an accountable and transparent public sector.[1]
2.2
This chapter provides a brief history of the financial framework and the
ongoing role that the Joint Committee of Public Accounts and Audit (JCPAA) has
played in its evolution, followed by background to the genesis of the Public
Performance, Governance and Accountability Bill 2013. The final part of the
chapter provides an overview of the high level features of the Bill drawn from
the Explanatory Memorandum.
The history of the existing
legislation – FMA Act and CAC Act
2.3
In April 1989 an inquiry of the Audit Office by the then Joint Committee
of Public Accounts (JCPA) recommended that the Audit Act 1901 be
replaced with separate acts to deal with auditing and financial administration.[2]
2.4
The Committee’s report was the result of an extensive twelve month
inquiry, in which ten public hearings were conducted (with a total of 57
witnesses appearing), 47 submissions were received and comparative evidence was
gathered about multiple international Auditors-General.
2.5
The package of Bills was first introduced to the House of
Representatives in June 1994 at which time it was referred to the JCPA for
review.[3] The package included the
Auditor General Bill 1994, the FMA Bill 1994 and the CAC Bill 1994. The JCPA
was initially asked to report its advice by 23 August 1994, however, due
to the breadth and detail of evidence it received, the Committee was granted an
extension to 22 September 1994. In conducting the inquiry the Committee
received 66 submissions, conducted six public hearings and was also briefed on
27 July 1994 by the Comptroller and Auditor General of the UK. [4]
2.6
In its advisory report, the JCPA recommended a series of amendments to
the CAC Bill 1994 and two minor changes to the FMA Bill 1994. These were
reflected in Government amendments made in the House of Representatives before
passing the Bills on 8 December 1994. However, the Bills lapsed as they did not
pass both Houses in the same form before Parliament was prorogued for the 1996
Election.[5]
2.7
In October 1997, the following three Acts replaced the Audit Act (a
similar package to that first introduced to the House of Representatives in
1994):
n Auditor-General
Act 1997 (which provided for the powers and functions of the Auditor-General)
n Financial
Management and Accountability Act 1997 (FMA Act)
n Commonwealth
Authorities and Companies Act 1997 (CAC Act)
2.8
Introducing the Acts to Parliament, the then Minister for Finance
advised that the separate FMA and CAC Acts accounted for Commonwealth bodies
having two different types of financial administration:
…Commonwealth bodies differ according to the basic legal
financial status that each one has—namely, whether the body has the legal
capacity, in its own right, to acquire ownership of money and other assets
coming into its possession, or whether it acts only as a financial and
custodial agent for the Commonwealth, without acquiring separate legal ownership
of such money and assets.[6]
2.9
Accordingly, the FMA Act pertains to Commonwealth bodies that do not
acquire legal ownership of the money they raise and spend. This Act specifies
the responsibilities and powers necessary for the efficient, effective and
ethical use of the resources lawfully held by the Commonwealth.[7]
2.10
The CAC Act pertains to financially autonomous Commonwealth bodies that
have legal ownership of money. The Act streamlined accountability requirements
of Commonwealth authorities and companies by providing a single set of
reporting and auditing requirements that replaced those in the individual
enabling legislation and constitutions of these bodies.[8]
2.11
Both Acts were intended to clarify and strengthen transparency and
accountability arrangements by introducing mechanisms that:
n placed responsibility
directly on individual directors and chief executives of bodies as opposed to
the bodies more broadly, and
n increased the role of
parliamentary control in decision making:
Þ The FMA Act introduced a new funding model in which all spending by Commonwealth agencies was classified as appropriation requiring tabling in parliament.
Þ The CAC Act defined the Finance Minister's Orders as disallowable instruments, creating
an ongoing role for the parliament in determining the reporting obligations of
directors of Commonwealth authorities.
2.12
In 2000 the JCPAA tabled Report 374: Review of the Financial
Management and Accountability Act 1997 and the Commonwealth Authorities
and Companies Act 1997. The Committee found that in general the legislation
had accommodated the new financial management framework and the needs of the
public sector. The Committee made four recommendations aimed at improving
consistency in terminology and ensuring reporting met the needs of Parliament.[9]
The Commonwealth Financial
Accountability Review
2.13
In December 2010 the Minister for Finance and Deregulation announced that
the Department of Finance and Deregulation (Finance) would undertake the
Commonwealth Financial Accountability Review (CFAR). The review would be an
opportunity to analyse the existing Commonwealth financial framework from first
principles and develop a framework that had the flexibility and capability to
meet the changing demands on government.[10]
2.14
Noting that the CFAR was the first major review of the Commonwealth
financial framework since the establishment of the FMA Act and CAC Act, Finance
outlined that the aim of the review was to ‘improve performance, accountability
and risk management across government, though a framework that is simple, easy
to use and valued by all stakeholders’.[11]
2.15
Finance made extensive efforts to engage with stakeholders, including with
‘town hall’ type meetings, moderating a blog and requests for submissions to
inform the review. Throughout this process the department maintained a regular
dialogue with the JCPAA.
2.16
In March 2012, Finance released the CFAR Discussion Paper, Is Less
More? Towards Better Commonwealth Performance. This first paper was
generated to stimulate debate on the financial framework and help inform the
development of options to be presented to the Government at a later stage.
2.17
In November 2012, Finance released the CFAR Position Paper: Sharpening
the Focus. The position paper put forward options for a number of significant
reforms to the public sector financial framework, most notably a suggestion to
move from prescriptiveness and towards more principles-based legislation.
The draft Bill
2.18
According to Finance’s submission to the Committee and evidence provided
to the Senate Finance and Public Administration Committee at the most recent
Estimates hearing, consultation on the draft Bill started in February 2013. The
draft Bill was released to a core working group, which included the
Auditor-General.[12]
2.19
Following several iterations, the draft Bill was then released in April to
all the entities that Finance had met with and to all portfolio departments and
agencies with a request to distribute to agencies within the portfolio. A full
list of stakeholders included in Finance’s consultation process is at
Attachment E of their submission to the JCPAA.[13] In an iterative process
the draft Bill was refined in response to concerns raised by stakeholders.[14]
2.20
The Public Governance, Performance and Accountability Bill 2013 was then
introduced into the House of Representatives on 16 May 2013.
About the Public Governance,
Performance and Accountability Bill 2013
2.21
Stemming from the CFAR, the Public Governance, Performance and
Accountability Bill 2013 is proposed to replace the FMA Act and the CAC Act with
a single Act to govern the management of public resources and the performance
of Commonwealth bodies.
2.22
According to the Explanatory Memorandum, the Bill will set the
foundation for the implementation of the broad range of reforms coming out of
the CFAR. These reforms are expected to result in:
n improved quality of information
to Parliament to support its constitutional role in relation to Commonwealth
expenditure;
n a more mature
approach to risk across the Commonwealth;
n improved productivity
and performance of the Commonwealth public sector with concomitant benefits for
a broad range of stakeholders; and
n reduced red tape
within the Commonwealth and for partners who contribute to the delivery of
Australian Government programs and services, including grant recipients.[15]
2.23
The Bill provides objects of the Act as follows:
n to establish a coherent
system of governance and accountability across Commonwealth entities; and
n to establish a
performance framework across Commonwealth entities; and
n to require the
Commonwealth and Commonwealth entities:
Þ to meet
high standards of governance, performance and accountability; and
Þ to
provide meaningful information to the Parliament and the public; and to use and
manage public resources properly; and
Þ to work
cooperatively with others to achieve common objectives, where practicable; and
n to require
Commonwealth companies to meet high standards of accountability.[16]
Financial Impact
2.24
While there are no explicit financial implications associated with the
Bill, the Explanatory Memorandum suggests that there are potential gains
through improved operational efficiencies for Commonwealth entities.
2.25
The Explanatory Memorandum notes the example of the Australian
Securities and Investments Commission’s (ASIC) experience transferring from the
CAC Act to the FMA Act to demonstrate the current inefficiencies due to the
complex regulatory burden placed on FMA Act agencies, regardless of their size.[17]
Issues to Address in the Existing
Commonwealth Financial Framework
2.26
According to the Explanatory Memorandum, this Bill seeks to lay the
foundation to address a number of issues that have emerged since the bifurcated
model was introduced in 1998, including:
n Fragmentation and
increased complexity with the FMA and CAC Acts as a result of incremental
amendments made to ‘maintain their serviceability and to respond to emerging
issues’.
n The distinction
between entities under the FMA Act and entities under the CAC Act is
overstated, and confuses operational independence with ownership. Regardless
of the Act the body operates under, the money and property held are public resources.
n A choice between the
two basic governance models does not provide for the administrative and legal
diversity across Commonwealth entities.[18]
2.27
In addition to the primary issues outlined above, the following matters
have also been raised:
n Some provisions have
resulted in regulatory costs disproportional to the materiality of the issues
they seek to address (e.g. drawing rights and FMA Regulation 9)
n The majority of
Commonwealth entities, regardless of the Act they work under, receive all or
most of their funding from the Parliament through the appropriations process
n Independence is not
defined by the Act a body exists under, with a number of FMA Act agencies
having significant statutory independence (e.g. the Australian National Audit
Office)
n Greater clarity is
needed in the way that employment arrangements interact with governance
arrangements
n While there is a strong
focus on financial accountability, little consideration is given to the achievement
of objectives and purposes or the quality of performance monitoring and
evaluation.
n There is limited
focus on a whole of Australian Government perspective.[19]
Key elements of the PGPA Bill
2.28
According to the Explanatory Memorandum, the proposed reforms are based
on four guiding principles, that:
n government should
operate as a coherent whole;
n uniform set of duties
should apply to all resources handled by Commonwealth entities;
n performance of the
public sector is more than financial; and
n engaging with risk is
a necessary step in improving performance.[20]
Government as a whole
2.29
The Bill aims to provide a consistent approach to the governance,
performance and accountability of the Commonwealth, at the level of primary
law. However, it is noted that:
n exceptions will be
made to accommodate particular mandates contained in enabling legislation; and
n the Bill will
explicitly exempt the High Court of Australia and the Future Fund Board of
Guardians (though not the Future Fund Management Agency) from its ambit.[21]
2.30
The Bill creates two primary categories of Commonwealth body:
n Commonwealth
companies
n Commonwealth entities
Þ non corporate
Commonwealth entities
Þ corporate
Commonwealth entities (legally separate from Commonwealth)
2.31
All Commonwealth entities will be required to keep Ministers and the
Parliament informed, and the Commonwealth Auditor-General will continue to be the
auditor. There will be a uniform set of duties on all accountable authorities
and officials; and defined responsibilities for all Ministers when they approve
proposed expenditure proposals.[22]
Independence of entities
2.32
According to the Explanatory Memorandum, the Bill does not seek to alter
the operational independence of entities as set out in their enabling
legislation. The Explanatory Memorandum provides the following example:
… the ABC has a number of current exemptions from the CAC Act
and, with limited exceptions, is not subject to direction by the Government
(subsection 8(1) of the ABC Act). Various provisions in the SBS Act (sections
11, 12 and 13) maintain the independence and integrity of Special Broadcasting
Service (SBS) in relation to the content and scheduling of programs. Other
arrangements go to the independence of their respective Boards of the ABC and
SBS and appointment of their Managing Directors. … It is not intended that
the ABC’s or SBS’s independence will be compromised by the PGPA Bill.[23]
Uniform duties
2.33
In an attempt to align the Commonwealth sector with the private and
not-for-profit sectors, the duties of officials within the Bill are based on the
fiduciary duties contained in the Corporations Act 2001. A number of the
duties imposed on officials also align with requirements under the Public Service
Act 1999 Code of Conduct.[24]
Public resources
2.34
The Bill seeks to clarify the concept of public resources through the
introduction of a single definition that applies to all money and all property
held by Commonwealth entities.[25]
Planning and evaluation
2.35
The Bill aims to establish the means to provide ‘a clear cycle of
planning, measuring, evaluating and reporting of results to the Parliament,
Ministers and the public’ by:
n
explicitly recognising the high-level stages of the resource
management cycle;
n recognising the value
of clearly articulating key priorities and objectives;
n requiring every
Commonwealth entity to develop corporate plans;
n introducing a
framework for measuring and assessing performance, including requiring
effective monitoring and evaluation; and
n maintaining the
rigorous audit arrangements currently in place.[26]
2.36
The Department of Finance and Deregulation indicates it will ‘play a
stronger role in encouraging a more systematic approach to performance
monitoring and evaluation’.[27]
Risk management and earned autonomy
2.37
The Bill includes ‘an express duty on an accountable authority to ensure
that the entity for which it is responsible has appropriate systems of risk
oversight and management’.[28]
2.38
The provision to allow the Finance Minister to prescribe matters or make
different provisions in relation to particular Commonwealth entities or classes
of entities underpins the proposed system of earned autonomy. Rules to the
Bill, developed in consultation with Commonwealth entities, are as the proposed
mechanism to operationalize earned autonomy—‘[t]he nature and extent of
oversight and regulatory intervention exercised will depend on an entity’s risk
profile and performance’.[29]
Cooperation and partnering
2.39
The Bill places explicit obligations on accountable authorities to
encourage officials within their entities to cooperate with partners, and to
consider the effect of compliance burdens being placed on partners when dealing
with them.[30]
Accountability
2.40
The Bill includes provisions for performance monitoring, evaluation and
reporting, including annual reporting. In regard to annual reporting the Bill
provides for an increased role for the JCPAA ‘approving the proposed annual
report requirements for all Commonwealth entities’.[31]
Penalties and sanctions
2.41
Apart from an exception relating to removal of an accountable authority
in the case of breach of duties, ‘the Bill does not contain specific penalties
and sanctions. This is to avoid duplication of provisions already existing
under other legislation or legal arrangements’.[32]
Simplification
2.42
By moving away from prescriptive legislation to a principles-based
model, the Bill aims to remove or modify undue and unnecessary regulation or
administrative requirements, and instead focus on areas of high risk. However,
it is noted that ‘the framework will require reporting obligations to be
periodically reviewed to ensure they continue to meet their intended objectives
efficiently and effectively’.[33]
2.43
Suggested future directions include ‘options to streamline financial
reporting requirements for Commonwealth entities, including through the
introduction of tiered or differential financial reporting arrangements’.[34]
Rules
2.44
As is the case with the existing FMA and CAC Acts, the Bill has
provisions for the Finance Minister to issue more detailed rules, including
allowing for modifications of framework requirements for intelligence, security
and law enforcement agencies.
2.45
The Bill makes explicit the areas in which, and in some parts the extent
to which, the Finance Minister can make rules.
2.46
In addition to assuring that the rules will be developed in consultation
with Commonwealth bodies and remain disallowable instruments, the Explanatory
Memorandum also suggests that the JCPAA will have a role in the development and
approval of the rules.[35]
Consequential amendments
2.47
The Explanatory Memorandum provides assurance that ‘the enabling
legislation of all statutory authorities, including the ABC and SBS, will be
updated through consequential amendments to allow for a continuation of
existing exemptions from specific financial framework requirements that relate
to them’.[36]