Introduction

1.1 The financial disclosure scheme was introduced in 1983 to increase overall transparency and inform the public about the financial dealings of political parties, candidates, senate groups and others involved in the electoral process. Regulation of the receipt and public disclosure of campaign funding and expenditure was seen as complementary and a necessary corollary to the introduction of public funding of political parties and candidates.

1.2 The financial disclosure scheme requires specified participants (entities) in the electoral process that receive funding⁶, provide funding⁷, or incur electoral expenditure⁸ to lodge financial disclosure returns with the Australian Electoral Commission (AEC). Such information assists voters to make judgements knowing who funds political representatives and to what extent.

1.3 There are two main types of financial disclosure returns, annual and election returns. Annual financial disclosure returns are to be submitted by: registered political parties and the state and territory branches of registered political parties; associated entities; political campaigners⁹; third parties; and donors. Election returns are to be submitted by candidates, senate groups and donors.¹⁰ The information that is to be disclosed varies depending on the type of entity. The information requirements for each type of return and entity are illustrated in Table 1.1 on the following page. Key terms included in this table are defined in Appendix 5.

Legislative framework

1.4 The legislative framework which applies to the financial disclosure scheme is contained in the Commonwealth Electoral Act 1918 (Electoral Act). There are no legislative or regulatory instruments in place to provide additional guidance on how the financial disclosure provisions under the Act are to be monitored or how the scheme is to be administered by the AEC.

1.5 Since its introduction in 1983¹¹, the financial disclosure provisions of the Electoral Act have been subject to four substantial amendments. In 1995, the financial disclosure provisions were expanded to include associated entities¹² and to require donors to submit financial disclosure returns. In 1998, the investigatory powers of the AEC were expanded to allow it to conduct an investigation to determine if an entity is, or was, an associated entity. In 2006, the Electoral Act was amended to:

• increase the disclosure threshold¹³ from $1500 to $10,000, indexed annually to CPI.
  • for the 2019–20 financial year, the disclosure threshold was $14,000;
• extend the definition of an ‘associated entity’ to apply to entities that are a financial member of a registered political party, and/or entities that have voting rights in a registered political party;
• extend the application of the financial disclosure provisions to a new category of entity (third parties);
• require donors to disclose the total amount of donations (gifts) made over the threshold;
• require entities that incur political expenditure, now electoral expenditure, over the disclosure threshold to submit a financial return to the (AEC); and
• remove the requirement for publishers and broadcasters to furnish returns on electoral advertisements.¹⁴

1.6 In November 2018¹⁵, the Electoral Act¹⁶ was amended to:

• ban the receipt of foreign donations over $1000;
  • the onus of ensuring that the limitations on the receipt of funds ‘gifts’ from foreign entities is complied with is the responsibility of the recipient of the gift;
• introduce a new class of entities (political campaigners) that have disclosure obligations;
• require associated entities and political campaigners to register with the AEC;
• revise the election funding model;
• expand the ability of the AEC to undertake compliance reviews on political campaigners, third parties, and donors;
• amend the enforcement provisions from a strict liability to a civil regime to deal with non-disclosure; and
• require the publication of a register (known as the transparency register) that identifies all political parties, associated entities, third parties, political campaigners, organisational and individual donors known to the AEC.
  • the transparency register was released in December 2018 and is intended to allow the public to view all annual and election returns submitted by all the entities that have disclosure obligations under the Electoral Act.

Responsible administering entity

1.7 The AEC is responsible for managing the financial disclosure scheme. The Electoral Act provides enforcement powers, including the authority to undertake compliance reviews and investigations to ensure that entities are complying with their legislated requirements. As such, the AEC has obligations similar to other regulatory bodies (such as the Australian Competition and Consumer Commission, the Australian Prudential Regulation Authority, the Australian Securities and Investment Commission, and the Australian Transaction Reports and Analysis Centre) to manage and administer the scheme in such a way that it can provide assurance that entities that are required to submit financial disclosure returns are complying with their obligations.

1.8 In June 2020, the AEC advised the ANAO that its approach to the funding and disclosure regime is one of education to achieve disclosure.

Compliance Review Committee

1.9 The Compliance Review Committee (CRC) was established by the AEC in 2014.¹⁷ It is responsible for approving and monitoring the disclosure schemes’ compliance review program. This includes approving the selection of reviews, considering changes to the risk matrix, considering changes to the methodology for conducting reviews, monitoring the progress of the compliance program, and amending the selection of reviews if required.

1.10 The Committee is chaired by the Deputy Electoral Commissioner. The other members of the CRC are the First Assistant Commissioner Capability, and the Assistant Commissioner, Disclosure Assurance and Engagement.

Electoral Integrity Reforms

1.11 In September 2017, the AEC identified that the proposed changes to the Electoral Act would require the AEC to develop and implement new systems (including ICT systems) and processes to facilitate enhanced financial disclosure reporting obligations of affected individuals and organisations, and that its role to administer and enforce the new regime would require additional suitably skilled staff to:

• process an increased number of disclosure returns, including associated reporting;
• perform compliance and assurance functions; and
• administer a new civil penalty regime.

1.12 In December 2017, the AEC was allocated $56.5 million to implement the Electoral Integrity Reforms. The funding was provided to design and implement the technology and systems and meet additional staffing costs to administer and manage an expanded scheme. Of the $56.5 million the AEC allocated $19.5 million to design and deliver a Self-Service Platform (SSP).¹⁸ At the time of this performance audit, the SSP has not been delivered and the additional resources have not been engaged. The AEC advised the ANAO in June 2020 that the SSP is scheduled for delivery in the first quarter of 2020–21 and that recruitment of additional resources is underway. In July 2020, the AEC further advised the ANAO that $31 million (55 per cent) of the $56.5 million allocated in December 2017 has been spent.

Rationale for undertaking the audit

1.13 The administration of the financial disclosure requirements by the AEC was selected for audit because the purpose of the financial disclosure scheme is to preserve the integrity of the electoral system, maintain public confidence in the electoral process and reduce the potential for undue influence and corruption.¹⁹ The financial disclosure scheme is also a central pillar of the Australian arrangements to provide electors with sufficient information on which to base selection of their political representatives.

Audit approach

Audit objective, criteria and scope

1.14 The objective of the audit was to examine the effectiveness of the AEC’s management of financial disclosures required under Part XX of the Commonwealth Electoral Act 1918.

1.15 To form a conclusion against the audit objective the following high level audit criteria were used:

• Has the AEC established effective arrangements to administer the financial disclosure scheme?
• Has the AEC developed and implemented effective compliance monitoring arrangements?

1.16 The audit scope focused on the administration and operations of the financial disclosure scheme since the McLeod review was completed in November 2012 and addresses how the AEC:

• identifies those with disclosure obligations;
• supports compliance with the scheme;
• ensures that financial disclosure returns are accurate and complete;
• selects and conducts reviews of financial disclosure returns;
• conducts investigations into possible contraventions of the financial provisions; and
• addresses non-compliance.

Audit methodology

1.17 The audit has examined records (electronic and hard-copy) held by the AEC, including records stored in group folders, Microsoft SharePoint, and email traffic stored in group mailboxes. All of the financial disclosure returns submitted from 2015–16 through to 2018–19 were tested for accuracy, completeness and timeliness using data extracted from a full back-up copy of the returns management system. All the compliance reviews planned and completed between 2015 and 2019 have also been tested.

1.18 Interviews were held with staff involved in administering the financial disclosure scheme, and undertaking compliance monitoring activities. Interviews were also held with law enforcement agencies. The interviews were conducted to examine to what extent the AEC engages with law enforcement agencies as part of administering the financial disclosure scheme and managing its compliance monitoring program, particularly in relation to implementing the changes made to the Electoral Act in November 2018 that banned political parties from accepting foreign donations.

1.19 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of $723 000.

1.20 The team members for this audit were Joyce Knight, Cherise Reed, David van Schoten, Josh Carruthers, Irena Korenevski and Brian Boyd.

2.1 To examine the AEC’s administration of the financial disclosure scheme, the ANAO examined:

• the extent to which the AEC has obtained returns from those with disclosure obligations;
• evidence about whether the returns submitted are accurate and complete;
• the extent to which the AEC analyses the returns it obtains; and
• the identification and management of risks to the scheme.

Does the Australian Electoral Commission obtain returns from all parties required to submit annual and election returns?

2.2 The AEC’s approach to identifying entities required to submit an annual or election return varies depending on factors such as whether reporting entities are required to be registered.

• Political parties, candidates and senate groups are identified by the AEC from its records of the registration and deregistration process for political parties, and its records of the nominations process for candidates and senate groups.
• Associated entities self-identify, or are identified by the relevant political party. In 2014–15 and 2016–17 the AEC requested each political party provide a list of its associated entities. This was not done for 2015–16, 2017–18 or 2018–19. The AEC advised the ANAO in June 2020 that ‘the letters to political parties about identifying associated entities are not a requirement under the Electoral Act. The AEC’s experience with this process in the past is that the response has been patchy and we are not convinced of the value of this approach in identifying associated entities.’
• To identify associated entities of political parties the AEC has made some use of media monitoring. The AEC also has the power to investigate if an entity is, or was, an associated entity.²¹ While AEC records indicate that it identified two entities in 2017–18 and 2018–19 that may be associated entities²², its records do not demonstrate that it has contacted or investigated the two entities to establish if a disclosure obligation exists.²³ While the AEC advised the ANAO in June 2020 that it had decided at the time that there was insufficient evidence to warrant writing to the entities as potential associated entities, no record of this decision was made.
• From January 2019, associated entities are required to register with the AEC. The AEC automatically registered all entities that lodged an annual return as an associated entity in 2017–18 as part of establishing the transparency register, see paragraph 1.6. Entities that no longer consider themselves to be an associated entity can apply to deregister. Since January 2019, 11 entities have deregistered.
• Environmental scans and monitoring of the media are also used to identify potential third parties. For example, between 2017–18 and 2018–19 the AEC identified a total of 16 entities that may need to provide a third party return. Of the 16 entities, five submitted a return for 2017–18 or 2018–19 without any action required. One registered as a political campaigner. One of the entities was identified as a result of a complaint received in relation to the communication of electoral matter and subsequently submitted a third party return for 2018–19. For the remaining nine entities there is no evidence that the AEC contacted the entity to advise that a potential third party obligation had been identified. The AEC subsequently advised the ANAO that out of the nine entities one lodged a third party return and a donation from one was included in another entities third party return. For five entities, the entities’ websites were reviewed and it was determined that the activity would not have exceeded the disclosure threshold, or was outside disclosure obligations (the same sex marriage postal survey) and as such no further action was undertaken.²⁴ For the remaining two entities, the AEC did not provide a response.²⁵
• Political campaigners were introduced as a new category of reporting entity in November 2018 and are required to be registered with the AEC. In January 2019 and early February 2019, four entities registered as a ‘political campaigner’. In mid-February 2019, to identify entities likely to be required to register and provide an annual return as a political campaigner the AEC analysed third party returns submitted in 2015–16, 2016–17 and 2017–18 and identified a further 18 entities that may need to register as a political campaigner. In April 2019, 23 entities had registered. Of the 23 registered political campaigners, 22 submitted a return for 2018–19, one entity de-registered in May 2019 and did not submit a return.²⁶ Additionally, one entity that was not a registered political campaigner also submitted a return.²⁷

2.3 There are opportunities for the AEC to make use of other available data sources to identify entities that may have disclosure obligations (as well as to provide assurance over the completeness of returns that are received). For example:

• Unions are required to register under the Fair Work Act 2009 with the Registered Organisation Commission (ROC) as a registered organisation and are required to submit financial statements that include disclosure of donations made; and
• the Australian Transaction Reports and Analysis Centre holds financial information for transactions over $10,000 that the AEC could request access to so as to identify entities that have disclosure obligations as a result of reported transactions.²⁸

2.4 To advise entities that they have a disclosure obligation the AEC issues legal obligation letters. The letters are tailored for each type of reporting entity. They set out the legislative basis for the disclosure obligation, identify the due date, set out the process for lodging a return and advise of how further information or assistance can be sought.

2.5 Political parties, associated entities and third parties that are known to the AEC are sent legal obligation letters after the end of each financial year. The AEC advised the ANAO in June 2020 that there is no requirement under the Electoral Act for the AEC to issue obligation letters by a set date and its standard practice is to aim to have the legal obligation letters issued before the end of July.

2.6 Reminder letters are to be sent within four weeks of the due date. Where the annual return has not been provided a week after the due date the AEC is to send a failure to lodge letter. The total number of legal obligation, reminder and failure to lodge letters that the AEC has issued over the four year period examined by the ANAO (2015–16 to 2018–19) is detailed below at Table 2.1.

Table 2.1: Number and type of correspondence issued per category of entity

Source: ANAO analysis of AEC documentation.

2.7 The ANAO’s analysis identified that 92 per cent of reminder letters, and 27 per cent of failure to lodge letters issued to the various categories of reporting entities were issued late.²⁹ For reminder letters the delay was on average 19 days, and 20 days for failure to lodge letters. There have also been a few cases where the AEC has not sent a legal obligation, reminder or failure to lodge letter, see Table 2.2 below.

Table 2.2: Number and type of each entity that had an obligation to disclose where no legal obligation, reminder or failure to lodge letter was sent

Source: Analysis of AEC returns management system.

2.8 For donors, legal obligation letters are sent when they are identified by the AEC during the processing of annual returns submitted by political parties and associated entities. As such, there is no set date that legal obligation letters are to be sent to donors.

2.9 For candidates and senate groups, a legal obligation letter is to be issued 30 days from polling day. For candidates that nominate an agent, the legal obligation letter is issued to the agent. Where the candidate does not nominate an agent, the legal obligation letter is to be sent to the candidate. Most candidates are endorsed by a political party, and as such the number of legal obligation letters issued does not match the number of returns due.

2.10 For candidates that nominated for the 2016 and 2019 federal elections, the number of legal obligation letters that were issued per type and the average number of days between the polling date and the date of issue of the letter is detailed at Table 2.3 below.

Table 2.3: Total number of each type of legal obligation letter issued to candidates for the 2016 and 2019 federal elections

Source: ANAO analysis of the returns management system.

2.11 As illustrated above, the AEC has not met its 30 day target to issue the legal obligation letters, and failure to lodge letters are not (on average) issued until more than 120 days after polling day. Where a failure to lodge letter is not complied with, the AEC attempts to contact the candidate, or the candidate’s agent directly.

2.12 The ANAO has identified that the AEC spent, on average, 240 days attempting to contact candidates that had not lodged an election return. When combined with the 120 days on average between polling day and the issuing of a failure to lodge letter it takes, on average, 360 days for the AEC to refer the matter to the Commonwealth Director of Public Prosecutions (CDPP) for potential prosecution. The AEC’s approach to managing non-compliance and its enforcement activities where candidates have failed to lodge an election return is discussed in more detail in Chapter 3, paragraph 3.87 and 3.88 of this report.

2.13 Overall, as illustrated in Table 2.4 on the following page, across the four years examined the AEC has obtained a total of 5882 financial disclosure returns (2569 annual returns and 3313 election returns).

Table 2.4: Annual and election returns obtained by the AEC: 2015–16 to 2018–19 as at 30 June 2020

Source: ANAO analysis.

2.14 Most (78 per cent) of the annual returns were obtained in accordance with the legislated timeframes. In a similar manner to the annual returns, 2774 election returns (83 per cent) were obtained within the legislated timeframes. In contrast to the annual returns lodged, the majority (71 per cent) of election returns are nil returns. This is because, where an electoral candidate is endorsed by a political party, the political party is to include the details in its annual return.

2.15 Of the annual returns that were lodged late, 67 per cent were lodged within 30 days of the due date, and 18 per cent were lodged more than 90 days after the due date. As illustrated below at Table 2.5, there were a small number of annual returns submitted more than three months after the due date.

Table 2.5: Number of days late by entity type: 2015–16 to 2018–19

Source: ANAO analysis

2.16 While some entities with legislated disclosure obligations have submitted returns late on multiple occasions the AEC’s approach to managing repeated late lodgement is passive, with the AEC advising that the first priority is to achieve disclosure.

2.17 Over the four year period assessed there were 50 entities that lodged late in two of the four years analysed, 15 that lodged late in three, and six that lodged late in each of the four years. Of the six entities that lodged late in all four years, one was a political party³⁰, four were associated entities³¹ and one a donor.³² Additionally, 44 entities that were late on two or more occasions, were on average over 30 days late, and of the 44 entities, 12 (27 per cent) that submitted late on more two or more occasions, were on average, over 120 days late. Nevertheless, the AEC has never referred an entity to the CDPP for late lodgement of an annual return.

2.18 Overall, as illustrated by Table 2.6, across the four year period analysed by the ANAO, as at the end of June 2020, it was evident that there are 75 returns that the AEC has not obtained from reporting entities.³³ Further details of the returns that have not been provided are listed in Appendix 3.

Table 2.6: Annual and election returns not obtained by the AEC: 2015–16 to 2018–19 as at 30 June 2020

Note a: Prior to 2018–19, the AEC did not require political parties that deregistered part way through a year to submit an annual return. Between 2015–16 and 2017–18 a total of 32 political parties deregistered part way through a year. The legislation has been amended ‘to avoid doubt’ that deregistered political parties are required to submit a return and the AEC now seeks returns from deregistered political parties to cover the part of the year for which they were registered.

Source: ANAO analysis of AEC records and AEC website.

Is there sufficient evidence that the annual and election returns are accurate and complete?

2.23 As at February 2020, annual and election returns can be lodged electronically through the eReturns portal, sent through the post, faxed or emailed directly to the AEC. For returns that are not submitted via the eReturns portal the AEC manually enters the data into the returns management system.

2.24 As part of processing the returns that are received, the AEC checks whether:

• the right type of return has been lodged³⁴;
• that the return has been signed by the correct signatory³⁵;
• all transactions listed are within the relevant period; and
• all relevant fields are complete and appear to be correct.

2.25 As part of processing the financial disclosure returns, the AEC looks for some obvious errors, for example, where electoral funding provided by the AEC or a state electoral authority has been disclosed as a ‘donation’ rather than an ‘other receipt’.

2.26 There are opportunities for the AEC to undertake further checking of internal data sources to provide an indication of the accuracy and completeness of returns. For example, for political parties, the AEC guidance material does not identify if the amount of electoral funding³⁶ provided by the AEC is to be cross checked with the value of total receipts, as disclosed by the relevant political parties, or identified as a receipt over the threshold.

2.27 For example, after the 2016 federal election, 24 political parties were allocated $62 million in funding. Three received funding less than the disclosure amount and as such were not required to disclose it as a receipt over the threshold. Of the remaining 21 political parties, twelve (57 per cent) disclosed the correct amount.³⁷ The remaining nine parties (43 per cent) received election funding amounts above the disclosure threshold without disclosing any of this funding in their annual return as a receipt over the threshold. The amounts totalled $325,340.³⁸

2.28 In April 2018, the AEC identified six³⁹ out of the nine political parties that had received electoral funding and failed to disclose it.⁴⁰ The AEC subsequently wrote to the parties identified and the parties contacted submitted amendments to correct the oversight.

2.29 In addition to not disclosing election funding as receipts above the threshold, it was evident from this analysis that total receipts were also under-reported by some parties. Specifically:

• the Jacqui Lambie Network disclosed total receipts for 2016–17 of $2750 with the election funding received of $73,963 clearly not included in the total receipts;
• the Glenn Lazarus Team disclosed $500 in total receipts (or two per cent of the $21,435 in electoral funding it received); and
• the Bullet Train for Australia Party received $15,801 in electoral funding. This party deregistered on 23 May 2017. As such the AEC did not send a legal obligation letter to the party and a return was not submitted.⁴¹

2.30 Across seven election events held in 2018–19⁴², 28 political parties have received $54 million in election funding. Of the 28 political parties, 18 received funding where the individual transactions were less than the disclosure threshold and as such were not required to disclose it. Of the remaining 10 political parties that received funding, eight political parties correctly reported the funds received as an ‘other receipt’ received over the disclosure threshold. Two political parties did not.⁴³

2.31 The AEC does not have processes or systems in place, outside of the compliance review program, to match data in the return with financial data reported elsewhere by the entity. For example financial statements published by organisational donors, financial statements provided by organisations registered with the Australian Charities and Not for profits Commission⁴⁴ or Unions registered with the Fair Work Commission and identified on the ROC register.⁴⁵

2.32 While the AEC’s guidance material states that the AEC undertakes data matching this is a manual process and its effectiveness is limited. The purpose of the data matching that is undertaken is to identify donors that may have a disclosure obligation and have not provided a return as well as to identify errors in amounts reported in donor and recipient returns. While the AEC identifies discrepancies between the recipients and donors of donations over the threshold, the effectiveness of this process is limited due to the varying disclosure requirements that apply to different entities. Political parties are not required to report multiple donations received that are under the disclosure threshold where the total value exceeds the disclosure threshold, whereas donors are required to report multiple donations made where the total value exceeds the disclosure threshold.

2.33 The total number of discrepancies and the value of under and over-disclosures is outlined below at Table 2.7. To try and resolve identified discrepancies the AEC engages with the donor and the political party, a process that can take up to 12 months (if resolution is achieved).

Table 2.7: Number and value of discrepancies identified by the AEC

Source: Analysis of donor discrepancies.

2.34 In June 2020, the AEC advised the ANAO that of the 496 discrepancies identified between 2015–16 and 2017–18, two for 2015–16, six for 2016–17, and nine for 2017–18 remain unresolved. The AEC further advised that work to identify discrepancies in the 2018–19 annual returns has commenced.

2.35 As such, the AEC is largely reliant on its annual program of compliance reviews on a selection of annual returns submitted by political parties and associated entities to provide sufficient evidence that the annual and election returns are accurate and complete. Chapter 3 examines the design and implementation of the compliance review program. It is worth noting that not all returns have been included in the scope of this program. For example, the program has not examined any:

• return that reported no financial data (a nil-return); or
• election returns submitted by donors.⁴⁶

Does the Australian Electoral Commission effectively analyse annual and election returns?

2.36 The analysis that the AEC does undertake is limited to annual returns submitted by political parties and associated entities. The AEC builds an annual return profile for each political party and associated entity. In light of the expanded compliance review program, introduced in January 2019, this analysis will need to be expanded to include third parties, political campaigners and donors.

2.37 Annual return profiling forms part of the risk assessment of each political party and associated entity and is used to develop the annual compliance review program (see Chapter 3). The annual return profile for associated entities and political parties tracks the reported value of total receipts, proportion of total receipts comprised of ‘gifts-in-kind’, detailed receipts (receipts over the disclosure threshold), total payments and total debts over a 10 year period. The return profile is comprised of two parts: the first part is an analysis of the information disclosed in the current and previous annual returns that have been submitted⁴⁷; and the second part seeks to identify anomalies.

2.38 While the analysis is intended to identify changes (risks) in established disclosure patterns, and detect anomalies that indicate obvious errors in the return, its effectiveness is limited. For example, the analysis asks if the ratio of detailed receipts to total receipts varies from the parties 10 year average by more than 50 per cent. Where the entity has not previously disclosed any detailed receipts an alert will not be raised. The analysis also asks if the ratio of total gifts in kind varies from the six year average by more than 95 per cent. While an alert will be raised where an entity has disclosed gifts-in-kind for the first time, it will not raise an alert where an entity has not disclosed any gifts-in-kind. As such, the analysis is geared towards identifying the likelihood that the information in the return is incorrect.

2.39 While the same tests are applied to associated entities and political parties, the annual return profiling activity does not take into account the varying sizes and/or complexity of the organisation, applying a one size fits all model. As a result, some of the entities will never trigger the alert as the levels of financial activity are not high enough, for example where the total of receipts, payments or debts disclosed do not exceed $5 million.⁴⁸ Further, where alerts are raised, a total of four alerts are required to highlight the anomalies as a risk. None of the tests or anomalies are weighted to indicate which anomalies, if any, constitute a higher risk.

2.40 In 2019, the tests to identify changes (risks) in established disclosure patterns, and detect anomalies that indicate obvious errors in the return were modified. The thresholds of the tests to identify changes (risks) in established disclosure patterns were increased, a new test was added (total payments exceed total payments over the previous three years) and one was removed (is the cash balance less than $0). One of the modifications made was to increase the ratio of detailed receipts to total receipts from the parties 10 year average from 50 per cent to 100 per cent. The analysis also asks if the ratio of total gifts in kind vary from the six year average by more than 95 per cent, this has now been increased to 100 per cent. While the number of tests to identify anomalies was reduced from 11 to seven, the number of alerts required to be triggered was not. As such, a political party or associated entity must now trigger a higher proportion of alerts in order for a flag to be raised. To determine the rationale for the changes the ANAO examined the meeting minutes of the Compliance Review Committee for 2017, 2018 and 2019 and while there is evidence that the committee considered changes to the risk matrix (see paragraphs 3.23 to 3.25), there is no evidence that this included the changes to the annual return profiling activity.

2.41 Additionally, as discussed in paragraphs 2.24 to 2.31, the AEC does not undertake detailed analysis of the financial information that is provided, cross check information with other internal data sources such as the amount of election funding provided or external data sources such as the ACNC and ROC registers. As demonstrated by the analysis at paragraphs 2.27 to 2.30, there are considerable potential benefits to the AEC from greater use of data matching with figures included in disclosure returns. The results of data matching could also be used by the AEC to inform the selection of returns for compliance reviews.

2.42 Annual return profiles are not developed for returns submitted by third parties or donors, and there is no analysis done by the AEC on election returns.

Does the Australian Electoral Commission effectively identify and manage risks to the financial disclosure scheme?

2.45 The AEC Corporate Plan identifies five strategic risks:

• the Commonwealth Electoral Act and the AEC’s operating model loses relevance;
• the AEC is unable to uphold electoral integrity and transparency;
• the AEC fails to build trusting relationships with electors, political stakeholders and the government;
• the AEC cannot source and maintain a capable and trained APS and temporary workforce; and
• the AEC is not properly positioned for the future, with systems and processes not sustainable, relevant and modern.

2.46 The financial disclosure scheme plays a significant role in managing the risks associated with upholding electoral integrity and transparency, and maintaining the trust of electors, political stakeholders and the government.

2.47 The risk register for the business unit responsible for administering the financial disclosure scheme and conducting compliance reviews identifies a single operational risk — the AEC fails to identify non-compliance by political parties. There is no evidence that risks relating to other entities that have disclosure obligations have been assessed and are being appropriately managed in line with AEC’s risk management framework.⁴⁹

2.48 The risk of non-compliance by political parties was identified as a compliance, governance and integrity risk with seven identified controls:

• the issuing of legal obligation letters, reminders and stakeholder follow up to achieve timely disclosure;
• management of workloads to ensure that returns are uploaded to the AEC’s website by the public release date;
• returns are available for inspection and missing or incomplete disclosures come to the attention of the AEC;
• compliance reviews;
• education material provided to political parties and entities to assist entities to understand disclosure obligations;
• selection of entities for a compliance review; and
• work by staff is overseen by other staff members and branch management.

2.49 The AEC has rated the risk as medium and has accepted the risk. This approach does not align with the AEC’s approved risk management framework. The approach outlined in the risk management framework states that compliance, governance and integrity risks with a residual risk rating of ‘medium’ are to have a risk treatment plan developed, are to be escalated to an Assistant Commissioner to be managed and reports provided to the Organisational Health Committee.

2.50 According to the risk register the risk owner is an Assistant Commissioner, however there is no risk treatment plan in place. The risk register does not identify dependencies or identify how the controls will be monitored or tested and there is no reporting to the Organisational Health Committee or the Business Assurance Committee (in the quarterly risk management reports it receives) regarding the operation of the financial disclosure scheme.

2.51 In October 2015, the business unit risk register identified the returns management system as an operational risk to the financial disclosure scheme. As part of the Electoral Integrity Reforms the AEC is to design, develop and implement a Self Service Platform (SSP) to replace the returns management system. In October 2019, the project management plan identified that module four of this project is intended to deliver a funding and disclosure portal by the end of April 2020. An exception report outlining the status and progress of the SSP project was provided to the June 2020 board meeting, where the board was advised that the SSP project cannot deliver to its baseline schedule and an updated exception report will be tabled when revised schedule, costings and resource requirements are confirmed.

3.1 To assess the AEC’s compliance monitoring and enforcement activities for the disclosure scheme the ANAO examined:

• whether the AEC has applied lessons learned from how other electoral bodies regulate their schemes;
• the planning and conduct of compliance reviews, which are the key control the AEC relies upon to assure itself that disclosure returns are accurate and complete; and
• the AEC’s response to non-compliance where it has been identified.

Has the Australian Electoral Commission sought to learn lessons from how other electoral bodies regulate financial disclosure schemes?

3.2 In November 2019, the AEC advised the ANAO that:

• it ‘maintains an awareness of the financial disclosure frameworks within Australian jurisdictions and, to a lesser extent outside of Australia maintaining links to a number of relevant electoral management organisations’;
• ‘the array of schemes across Australia and internationally is diverse and the AEC is cognisant of the need for environmental awareness to support its administration of the Funding and Disclosure legislation’; and
• provided the ANAO with a summary of some of the activities it has undertaken in recent years to maintain ‘currency in the financial disclosure space’.

Previous reviews

3.3 In August 2012, the Electoral Commissioner initiated a review of the Australian Electoral Commission’s disclosure and compliance function, following criticism in the Parliament regarding the compliance review program, the selection of organisations for a compliance review and the AEC’s use of its investigatory powers.

3.4 The review was conducted by Ron McLeod AM. It was completed in November 2012 and concluded that the AEC needed to become more proactive in the way that it administers and enforces compliance with the financial disclosure scheme and introduce a better governance and management structure. The review made four recommendations with the AEC accepting all four recommendations. The ANAO’s analysis is that implementation action was inadequate across three of the four recommendations (see Appendix 2, Table A.1).

3.5 In 2013, a project team conducted relevant research and analysis of practices of other organisations with the same, or similar responsibilities as part of the AEC’s efforts to implement the recommendations from the McLeod report. AEC documentation states that the project team considered the compliance approaches of a number of organisations to update its business model and approach to regulating the financial disclosure scheme. These included the Electoral Commission (UK), Elections Canada, the Federal Election Commission, the New York City Campaign Finance Board, the New South Wales Election Funding Authority, Fair Work Australia, the Australian Taxation Office (ATO), the Australian Crime Commission (ACC), now the Australian Criminal Intelligence Commission, and the Department of Human Services (DHS), now Services Australia. Information obtained from these activities was used to assist the AEC to develop and implement the revised methodology to select entities for a compliance review as recommended by the McLeod review. The revised approach was piloted in 2014, and has been in effect since 2015.

Accessing specialist expertise

3.6 In 2013, the AEC met with the ATO to discuss its processes for identifying transactions that may not be reported in tax returns, and occurring ‘off the books’. The ATO advised that this is a very complex area and that its knowledge and experience has developed over many years. Accordingly, the AEC proposed buying in expertise and access to data that the AEC does not currently have. In December 2014, AEC records indicate that the Australian Crime Commission offered AEC opportunities for learning and sharing. The AEC noted that the work is different to the compliance investigations undertaken by the AEC, therefore it considered that the training and learning opportunities would not be relevant. While the AEC stated that it would continue to send its staff to other learning and training opportunities such as with the Institute of Internal Auditors, in July 2020 the AEC advised the ANAO that no staff have attended training with the Institute of Internal Auditors.

3.7 In November 2016, the AEC informed its audit committee that the Commonwealth government procurement panels contain specialists with the necessary expertise that can be accessed by the AEC, and no further action on the relevant McLeod review recommendation was required.

3.8 In October 2019, the AEC proposed that specialist expertise should be engaged to assist with development of an enhanced compliance review program, including exploring options to meet the objectives of the Electoral Integrity Reforms and the associated changes made to the Electoral Act in November 2018. As a result of these changes, the AEC will need to be able to detect foreign donations and identify potential entities with disclosure obligations. As at June 2020, there is no evidence that the AEC has sought to obtain access to specialist expertise to develop the enhanced compliance program as required. As a result, the AEC has not yet established a framework for how foreign donations will be detected and treated.

Workforce and training requirements

3.9 AEC documentation examined by the ANAO identified that accounting related disciplines are required, with qualifications or experience in investigations desirable to effectively undertake and manage the compliance review program. In January 2018, critical gaps in the workforce were identified by the AEC. As at October 2019, the AEC was in the process of identifying options to engage additional resources necessary to deliver an expanded compliance review program, with a decision made to contract-in an additional 12 resources through a labour hire arrangement. As at May 2020, there is evidence that the AEC has commenced the development of a training needs assessment for the expanded compliance program, and recruitment activities have commenced.

Intelligence gathering, data interrogation and risk based sampling techniques

3.10 In April 2014, the AEC contacted officers from the ACC, the ATO and Fair Work Australia to discuss intelligence gathering, data interrogation and risk based sampling techniques. In late 2014 and 2015 the AEC stated in its internal responses to the McLeod Report that the discussions held around commonalities such as the ‘honest complier approach’ had been useful but the difference in scope and reach of the other agencies were significant and limited the exchange. In December 2014, these discussions were suspended and no further action has been undertaken.

Use of a tip-off facility

3.11 In 2014, the AEC observed that the ATO and DHS (Services Australia) use information that results from ‘tip-offs’ in their compliance program work. As such, the AEC established a tip-off facility. The tip-off facility was implemented in 2015 and uses a dedicated mailbox as well as the existing Financial and Disclosure group mailbox to receive tip-offs. The AEC’s publicly available information states that it may use tip-offs as part of its compliance work, and outlines how the AEC may use the information it receives. Information about the tip-off facility can be found on the AEC website, including links to the dedicated mailbox and a phone number. In June 2020 the AEC advised the ANAO that over 150 tip-offs have been received.

3.12 The ANAO’s analysis of the email traffic in the FAD Tip-Off mailbox identified that 114 discrete matters covering a broad range of topics have been raised with the AEC, with 21 matters categorised as unwanted, unsolicited digital communication (spam) or junk emails. Of the 93 matters remaining, 16 related to funding and disclosure.⁵⁰ Of the 16 matters, one was related to an existing investigation⁵¹, and two were redirected to other agencies as they were considered by the AEC to be outside of its jurisdiction. For the remaining 13 matters, the AEC has not recorded the outcome as part of actioning the matter.

Does the Australian Electoral Commission apply a risk based approach to planning and conducting compliance activities?

3.16 The AEC has identified that the number of entities with disclosure obligations means it is unable to examine the accuracy and completeness of all the financial disclosure returns it receives. As such, the AEC has established an annual compliance program in order to provide some assurance that entities with disclosure obligations are meeting them.

3.17 AEC guidance material identifies that its approach to compliance reviews does not presume that selected entities have failed to meet their disclosure obligations. Rather, party agents and financial controllers are:

treated as honest compliers who are conscientiously attempting to discharge their disclosure obligations.⁵²

Approval of the annual compliance review program

Compliance Review Committee

3.18 As discussed at paragraph 1.9, the Compliance Review Committee (CRC) is responsible for approving and monitoring the compliance review program. The role of the CRC is to: approve the selection of reviews; consider changes to the risk matrix; consider changes to the methodology of conducting reviews; monitor the progress of the compliance program; and amend the selection of reviews if required.

3.19 The AEC has advised that it aims to approve the annual compliance program as close as possible to the start of the calendar year.⁵³ The AEC plans to complete compliance reviews by the end of the calendar year to allow for the timely commencement of the new program on an annual basis. AEC documentation demonstrates that the guidance is inconsistent listing December, January and February as the date that the annual compliance review program is to be considered and approved.

3.20 Over the period assessed, the annual compliance review program has been considered and approved by mid-February up until 2017. In 2018 and 2019, approval of the annual program did not occur until March. While the CRC agreed in August 2019 that the 2020 compliance review program would include all 22 political campaigners, as at June 2020, the compliance review program has not been finalised.

Selection of entities for a compliance review

3.21 Prior to 2014, the AEC’s planned approach to compliance reviews was to review every political party and its associated entities over a three year electoral cycle, with approximately 60–70 reviews scheduled annually.

3.22 In response to the McLeod recommendations, the AEC established a pilot program in 2014 to select political parties and associated entities for a compliance review based on a revised methodology. The revised methodology was to select entities for a compliance review on the basis of risk, supplemented with selections based on the application of professional judgement and including a random element.

3.23 The AEC adjusted the risk matrix in 2015 and again in 2017. The criteria now consists of 10 risk factors that are grouped into three categories: error risks; materiality; and organisational profile. The AEC has identified four specific risks that are used to determine the error risk, two to determine materiality and four to assess risks related to the organisational profile. Each risk is individually rated using a six point rating scale (0 –5) and weighted to calculate a risk rating.

3.24 In October 2017, the AEC engaged consultants at a cost of $11,100 to conduct ‘agreed upon procedures’⁵⁴ as to whether the risk matrix provided ‘a robust and defensible methodology that can be efficiently and consistently applied’. The consultants found that the current risk matrix is ‘generally effective’ at selecting a sample of returns that are more likely to show error, and made eight recommendations, to address the following issues:

• some elements that have a higher bearing on the risk of non-compliance in terms of potential for error are not given sufficient weighting;
• returns identified to have errors based on conclusive criteria do not always have these errors resolved prior to the returns being published;
• the nature and weighting of risk matrix elements results in the compliance sample being skewed towards selection of political parties over associated entities; and
• there is some duplication and lack of clarity in some elements which can result in either a skewed compliance sample result or inconsistent application of the risk matrix.

3.25 The AEC agreed to four of the eight recommendations and agreed ‘in principle’ to four. Based on the ANAO’s examination of CRC meeting minutes held in 2018 and 2019, the AEC has not implemented any of the recommendations..

3.26 In addition, the ANAO’s analysis of the risk assessment process has identified a number of limitations.

• The materiality factors do not recognise that a zero dollar figure of total receipts is a risk. If a nil disclosure is lodged against total receipts, the resulting risk rating score is allocated the lowest possible score of zero. It is significant in this respect, as across the five year period examined, the AEC has not undertaken a compliance review of a ‘nil return’.
• The risk matrix only considers the value disclosed against total receipts as a stand-alone risk factor, it does not consider the value of total payments, or total debts. The total receipts figure comprises only one of six parts of the annual disclosure return. There is also no use of data matching (see paragraph 2.31) by the AEC to identify higher risk reports.
• The risk factor ‘number/value of amendments’ allows a limited timeframe for an entity’s risk rating to be adjusted to reflect any amendments that have been made. Only amendments made and lodged between the date that the return was lodged and the date that the risk assessment is completed are captured.⁵⁵
• The late lodgement factor does not take into account how late a financial disclosure return has been lodged, assigning the same rating to a return that is submitted less than 7 days late, to one that is submitted over 60 days late.

3.27 The below case study illustrates some of the shortcomings with the application of the risk assessment process. During the course of audit the ANAO extracted all of the annual returns from the returns management system and sorted all returns (per year) based on the value of total receipts (lowest to highest). During this process it was identified that the entity in the below case study had reported a total receipts figure of zero. An examination of previously reported values identified that the entity had previously reported a much higher value for total receipts. To determine if this was unusual the ANAO accessed the financial statements lodged by the entity with the ROC, where it was identified that the total receipts amount was incorrect and highlighted the impact of the limitations of the risk assessment processes employed by the AEC that have been identified.

3.28 While the risk matrix has not been updated since January 2017, for the 2019 compliance review program the selection of entities on the basis of the risk assessment has been modified to exclude entities that have had a compliance review conducted two or more times within the last three years. This change was made as the AEC noted that several entities were continually getting a high risk score.

3.29 The AEC has noted that undertaking compliance reviews on the basis of random selection provides an opportunity to evaluate the appropriateness and effectiveness of the risk based selection methodology. While two reviews completed in 2017 and 2018 that were selected randomly found material inaccuracies and non-disclosures, no adjustments were made to the risk assessment methodology in light of the findings of those reviews.

Full versus limited scope reviews

3.30 Compliance reviews may be either a full or limited scope review.

• Full reviews have set criteria for assessing annual disclosure forms and seek to confirm that the reported value of all of the figures included in the return are accurate. For political parties this can include a sample of party units.⁵⁶
• A limited scope review seeks to verify the accuracy of one or more parts of the annual disclosure return. There is no set criteria for limited reviews except for including an examination of receipts above the threshold. The AEC’s guidance material does not contain a clear methodology for determining the scope of a limited review, or calculating the number of hours that are to be allocated.

3.31 In 2015 and 2016, the number of hours allocated to a review was generally based on whether the review was a limited or full scope review. A budget of between 20 and 100 hours (68 hours on average) was allocated to conduct a limited review, except for three of the 35 reviews planned.⁵⁷ A budget of up to 250 hours, (111 hours on average) was allocated to conduct a full scope review.⁵⁸

3.32 In 2017, the AEC modified its approach to budgeting the hours required to undertake a compliance review. In 2017, the average number of hours budgeted for a limited review increased from 68 to 120 hours. In 2018 and 2019, the average number of hours budgeted to undertake a limited review increased again from 120 to 178 hours. The change in approach from 2017 is illustrated below at Table 3.1. This table shows that the percentage of limited reviews where the budget allocated was in excess of 100 hours comprised 100 per cent of the limited reviews planned in 2018 and 2019.

Table 3.1: Proportion of limited scope reviews allocated a budget in excess of 100 hours

Source: ANAO analysis of AEC documentation.

3.33 In 2019, 11 full and 11 limited reviews were planned, with a total of 1800 hours budgeted for limited reviews, whereas 1505 hours were budgeted for full reviews. These findings indicate that the budgeting of hours now incorporates an assessment of the size, complexity and operations of the entity when determining the scope of the review.

Allocation of resources

3.34 The AEC allocates resources to conduct compliance reviews on the same basis as selecting entities for a review. Of the resources available for compliance reviews, 75 per cent are allocated to compliance reviews selected on the basis of the risk assessment, 15 per cent selected on the basis of professional judgement and 10 per cent selected randomly. The planned and actual resources allocated for compliance reviews has fallen significantly since 2015.

• The reduction in total resources being applied to compliance reviews (the number of hours budgeted for 2019 is 40 per cent less than was budgeted for 2015) does not reflect an assessment that the level of risk has fallen.
• The proportion of reviews selected according the AEC’s risk assessment has increased (noting the shortcomings identified at paragraphs 3.23 to 3.26 with the AEC’s methodology), while there were no reviews planned or undertaken in 2018 or 2019 on the basis of professional judgment.
• The proportion of budgeted and actual hours no longer aligns with the AEC decision to allocate 75 per cent of hours to risk based reviews, 15 per cent to professional judgement, and 10 per cent to randomly selected compliance reviews.
• There were significant shortfalls in 2016, 2018 and 2019 (to date) in the number of actual hours invested in compliance reviews, compared to those budgeted, see Table 3.2 on the following page.

3.35 Testing of the compliance reviews demonstrates that while the selection of compliance reviews includes a risk based element, the AEC uses a resource driven approach to plan and conduct compliance activities. From 2017, the AEC has reduced the number of reviews that are planned.

3.36 In addition to reducing the number of planned reviews from 2017 onwards, resources to complete compliance reviews have also been re-deployed to other projects such as the implementation of the changes made to the Commonwealth Electoral Act 1918 (the Electoral Act) in 2018 and the development of a new election funding mechanism throughout 2019.

3.37 The increase in the value of disclosures, the decline in the number of completed reviews, and the declining percentage of the population selected for a compliance review (see Table 3.3), is not supported by an AEC risk assessment demonstrating that the overall risk of non-disclosure, the provision of false and/or misleading information and other non-compliant behaviours has declined. As a result, the AEC is unable to demonstrate that the compliance program, in its current form, is sufficient to provide assurance that the annual financial disclosure returns are meeting legislated requirements.

3.38 Due to legislative changes made to the disclosure scheme that came into effect on 1 January 2019, political campaigner, third party and donor returns for 2018–19 were the first ones able to be included in the compliance review program. As noted at paragraph 3.20, the CRC agreed in August 2019 that the 2020 compliance review program would include all 22 political campaigners. As at June 2020, the 2020 compliance review program has not been finalised.

Are planned compliance activities implemented in a timely and effective manner?

Conduct of compliance reviews

3.42 The AEC guidance material states that the AEC is to apply the Australian Auditing Standards to the conduct of compliance reviews. The specific products that the AEC refers to in its guidance material include the compliance plan, risk assessment, gathering of appropriate and sufficient evidence, appropriate analytical procedures, sufficient and appropriate audit documentation and reporting with regard to the financial records examined.

3.43 ANAO examination of the compliance reviews undertaken identified that the AEC’s compliance activities do not meet the Australian Auditing Standards.

3.44 As discussed at paragraph 3.18, the CRC approves the annual compliance review schedule. The schedule identifies if the review is to be a ‘limited’ or ‘full’ scope review and the number of hours that have been budgeted. For each compliance review, an individual compliance review plan is to be developed. These individual compliance plans identify the basis of the selection, results from preliminary work, the review scope, focus and justification, the methodology and the budgeted hours. They do not record the engagement or operational risks. Additionally, where a change to the scope of a review has occurred the rationale for the change in scope is not consistently documented.

3.45 There are a number of limitations identified in relation to the risk assessment processes employed by the AEC as discussed at paragraphs 3.26 to 3.28 of this report.

3.46 The AEC does not employ appropriate audit procedures to gather sufficient and appropriate evidence.⁵⁹ To obtain evidence the AEC outlines the documentation that it requires in the notice that is issued to the political party and/or associated entity that has been selected for a compliance review, known as a ‘section 316(2A) notice’. The notice outlines the information that is required, including: trial balances; bank account listings; cash receipt and cash payment journals; bank deposit slips for all amounts greater than the disclosure threshold; aged creditor listings; and audited financial statements where available. The notice includes a document checklist that entities are to certify and return. Testing undertaken by the ANAO of 40 compliance reviews conducted between 2017 and 2018 identified 16 (40 per cent) did not have a completed and certified documentation checklist on file. Additionally, the AEC does not gather the requested information directly from the systems used to provide the information, and does not observe the entity extracting the requested information from its accounting systems as all reviews are undertaken as desktop reviews. This approach means the AEC is placing significant reliance on entities to provide it with complete and accurate information.

3.47 Further, the AEC specifically states in its guidance that it does not provide an opinion on the adequacy of the internal controls.

3.48 The AEC has developed standardised testing procedures that it applies to test the information provided as part of conducting a compliance review of the annual return. While these testing procedures are modified to align with the scope of the review and the sections of the annual return that is being examined, there is no evidence to confirm that the testing process is evaluated to confirm that it meets the relevant auditing standard.

3.49 Lastly, at no point throughout the process, does the AEC require its compliance officers to certify that the review has been undertaken in accordance with the Australian Auditing Standards that it has identified are to apply.

Compliance reviews completed

3.50 The AEC has consistently performed poorly in terms of completing its annual program of reviews and has not completed the planned compliance reviews by the end of any of the last five calendar years.

3.51 The percentage of the population being tested has also declined while the total value of receipts, payments, and debts as reported since 2017 has increased, see Table 3.3. This growth is expected to continue as the total value of disclosures for 2018–19, just for political parties and associated entities, has increased from $2.3 billion in 2015–16 to $2.8 billion in 2018–19 (24 per cent).

Table 3.3: Comparison of completed compliance reviews to value of disclosures

Note a: Returns submitted for the 2015–16 financial year are reviewed in the compliance review program for the 2017 calendar year, returns submitted for the 2016–17 financial year are reviewed in the compliance program for the 2018 calendar year and returns submitted for the 2017–18 financial year are reviewed in the compliance program for the 2019 calendar year.

Note b: The blank cells are due to the ANAO conducting analysis of aggregate values for 2015–16 onwards.

Note c: As at March 2020, 15 reviews had been completed.

Source: ANAO analysis.

3.52 The number of ‘full reviews’ being conducted on large entities has also decreased over the period assessed. Since 2017, full reviews are primarily conducted on small or medium sized entities, with limited reviews conducted on large entities. In 2018, only one full review was conducted on a large entity and all full reviews in 2019 were conducted on small or medium sized entities. This is reflected in the reduction in the number of hours it has taken the AEC to complete full scope and limited scope reviews. In 2018 and 2019, the average number of hours to complete a full review decreased from 169 hours to 70 hours across 13 full reviews and for limited scope reviews the average decreased from 132 to 110 hours across 19 limited reviews.

3.53 The parts of the return that are subject to compliance review activity, the value of the transactions tested by the AEC, and the value of the amendments identified by the AEC have all declined, yet there has been no improvement in the error rate, see Table 3.5. As such, the decline in the number of findings (see Table 3.4) and the number and value of amendments does not demonstrate that the AEC is becoming more effective or that compliance rates are improving. Rather, it demonstrates that the AEC has reduced the number, scope and value of the transactions being tested through the compliance review program.

Number of compliance reviews conducted

3.54 The number of planned versus completed compliance reviews is illustrated below at Figure 3.1.

Figure 3.1: Number and scope of compliance reviews planned versus conducted

Note a: The 2019 program is still in progress, with 15 reviews completed as at 31 March 2020.

Note b: In 2018, there were three compliance reviews not completed and their planned scope is unknown.

Note c: In 2017, more full reviews were completed than planned, because four limited scope reviews were expanded to full scope reviews.

Source: ANAO analysis.

3.55 Across the five years examined the ANAO identified that 168 compliance reviews were planned. AEC records identified that there were 97 full scope compliance reviews and 68 limited scope reviews planned.⁶⁰ Of the 97 full scope reviews planned, 69 (71 per cent) have been completed and 28 (29 per cent) have not been completed. Of the 68 planned limited scope reviews, 41 (60 per cent) have been completed, with 27 (40 per cent) not completed. As at March 2020, 7 (10 per cent) reviews from the 2019 program had not yet been completed.

Review scope

3.56 Figure 3.1 illustrates the fall in the number of compliance reviews that have been planned and completed over the period assessed and also identifies the fall in the number of full scope reviews that have been conducted. Table 3.4 illustrates the impact of narrowing the scope of reviews that are conducted. There has been a reduction in testing along with the reduction in findings, but the proportion of findings has not improved. Across the five year period, all reviews tested receipts above the threshold and the proportion of findings remained stable (between 53 and 65 per cent). The proportion of findings across other parts of the annual returns fluctuated over the five year period. For example, the proportion of findings in total debts increased from 11 of 25 (44 per cent) in 2015 to 10 of 12 (83 per cent) in 2018.

Value of disclosures tested

3.57 The total value of disclosures selected for testing is also declining as detailed at Table 3.5. While the value of amendments is decreasing the error rate does not indicate that overall compliance is improving. Rather, it demonstrates that the AEC has reduced the number, scope and value of the transactions being tested through the compliance review program.

3.58 As illustrated above, in the 2015 and 2017 compliance review programs $194 million and $168 million in total receipts respectively was disclosed across all returns selected for a review with $162 million (84 per cent) and $142 million (85 per cent) tested. For total payments, $193 million and $156 million was disclosed with $161 million (84 per cent) and $129 million (83 per cent) tested. In 2019 the total receipts disclosed across all returns selected for a review was $35 million and total payments was $29 million. Of the $35 million in total receipts, $4 million (10 per cent) has been tested and of the $29 million in total payments only $3 million (10 per cent) has been tested. These significant reductions in testing have occurred at the same time that significant growth in the value of disclosures has occurred, see paragraph 3.51 and Table 3.3.

Value of amendments

3.59 Reflecting the reduction in the number, scope and value of transactions being tested, the value of amendments being identified by the AEC has also declined, see Figure 3.2.

Figure 3.2: Compliance reviews — comparison between reviews requiring amendments and the value of under and over disclosures

Source: ANAO analysis.

3.60 The analysis highlights that the value of under-disclosure and over-disclosures that are identified are impacted by the value of the transactions being tested. For instance, the spike in the value of under and over disclosures identified by the AEC in 2016 is due to the selection of a single associated entity, the CFMEU Construction & General Division (WA Branch) for a full compliance review. The CFMEU Construction & General Division (WA Branch) was responsible for $13.7 million (34 per cent) of the total value of under-disclosures identified and $38.7 million (84 per cent) of the total value of over-disclosures identified in that year.

Size of entity

3.61 The AEC guidance material states that political parties and associated entities are categorised as either small⁶¹, medium⁶² or large⁶³ on the basis of the total value of receipts.⁶⁴ The ANAO examined the number of full scope versus limited scope compliance reviews that have been conducted since 2015 according to the AEC’s categorisation of the size of the entity. As illustrated at Table 3.6, there has been a marked decline in the number of full reviews that are being conducted on large entities. Since 2017, full reviews have focused on small or medium sized entities, with limited reviews conducted on large entities. In 2018, only one full review was conducted on a large entity and all full reviews in 2019 were conducted on small or medium sized entities.

3.62 Some of the decline can be linked to the AEC undertaking a limited scope compliance review after an initial full scope review has been conducted on a large entity. Testing of compliance reviews conducted between 2015 and 2019 has identified 24 entities that have had multiple compliance reviews conducted across the five years examined. Of the 24 entities, 13 were large entities, (12 political parties and one associated entity) eight were medium entities (all political parties), with three entities where the size category changed across years due to increases/decreases in the total receipts figures disclosed (two political parties and one associated entity). Of the 13 large entities, all 13 had a full review conducted initially, with a subsequent limited review conducted at a later date for 10 (77 per cent), however there was no consistent duration between the reviews conducted. As discussed at paragraph 3.28, in 2019, the AEC modified the selection process to exclude entities that had been selected on multiple occasions.

Findings from compliance reviews

3.63 Findings from compliance reviews are communicated through the issuing of the draft report to the entity and publication of the final report on the AEC website.⁶⁵ Where the AEC has found instances of non-compliance with the disclosure requirements, the report identifies and explains the rationale for the amendment/s that are recommended. Non-compliance may be in the form of under-disclosure, over-disclosure, or require an administrative change. Over the period examined, the ANAO has not identified a case where the entity has not made the recommended amendment.

3.64 Under-disclosure is when an amount disclosed in the return is less than the correct sum, or an amount has not been disclosed as required. Over-disclosure is when the amount disclosed in the return is greater than the correct sum, or was not required to be disclosed. An administrative change can include an amendment to the details of the financial disclosure return, such as the name, address, and contact details of the party agent and/or financial controller, classification of receipt type, but no change to the amount disclosed.

3.65 Under-disclosure is considered by the AEC to be more concerning as it demonstrates that the disclosures are incomplete and inaccurate. The ANAO has observed, see Figure 3.2, that the value of under and over disclosures identified by the AEC has fallen in line with the reduction in the number and scope of compliance reviews that have been completed.

Monitoring and reporting

Internal monitoring and reporting

3.66 In 2015, the reporting to the CRC was ad-hoc with five reports provided after the compliance schedule was approved. In March, reports were provided to the CRC on the approach to reviewing party units and an evaluation of the risk based methodology. In April, October and December the CRC were provided updates on the progress of the 2015 compliance schedule. In August, the CRC approved a revised approach to conducting compliance investigations, and in December, agreed to institute a more structured reporting framework to occur on a quarterly basis in April, July, October and January of each year. The matters covered by the reports that were provided identified that resourcing issues and delays in receiving requested information were commonly encountered, particularly after an election had been called.

3.67 The ANAO has identified inaccuracies in the reporting provided to the CRC on the outcomes of compliance reviews that was potentially misleading. For example, seven limited reviews, which only tested receipts above the threshold, were reported as having ‘accurate’ results across all parts of the form including those parts not tested. Further, while the AEC prepared end of year reports for the 2014, 2015 and 2016 compliance programs, and prepared spreadsheets detailing the results, the AEC advised the ANAO in June 2020 that these reports were provided to the relevant branch head but not to the CRC.

3.68 A high level outline of progress is also provided to the AEC’s Executive Leadership Team. These reports did not include an update on the compliance review program until September 2016 and did not include any information on the findings of individual reviews until August 2017. Since August 2017, the weekly reports include an overview of the progress of the compliance review program, upcoming publication timeframes of reviews, and high level summary comments on the findings of individual reviews.

External monitoring and reporting

3.69 The AEC’s corporate plan and portfolio budget statements identify one performance measure that is used to assess the performance of the compliance review program: ‘compliance reviews of political parties and entities with disclosure obligations completed and published’. This measure was first included in the AEC’s 2018–2022 corporate plan. The ANAO applied the framework outlined in Appendix 4 to analyse the AEC’s performance measure.

3.70 The measure is not relevant. The measure is limited to identifying that compliance reviews have been conducted and does not provide any information to enable a user to identify if the purpose of the compliance reviews has been achieved. Namely to provide assurance that the disclosure returns are accurate and complete.

3.71 The measure is partly reliable. While the completion and publishing of compliance reviews is measurable, it does not include a quantitative target that can be used to assess the extent to which the compliance program is meeting its objectives, or determine if the performance of the regulated entities is improving, stable or declining.

3.72 The measure is not complete. The measure has no target, no timeframes, and does not use qualitative and quantitative measures to assess the overall performance of the AEC to undertake the compliance review activities or determine if the program is meeting its objectives.

Does the Australian Electoral Commission appropriately act upon identified non-compliance?

3.75 To assess the AEC’s approach to identified non-compliance, the ANAO identified the range of offences under the Electoral Act, the AEC’s policies and procedures outlining its approach to addressing non-compliance, and its use of the legislative powers available to investigate instances of non-compliance and take further action such as referring matters to the Office of the Commonwealth Director of Public Prosecutions (CDPP) for potential prosecution.

Offences

3.76 According to the AEC’s enforcement and prosecutions policy the five offences under Part XX of the Electoral Act include:

• failing to furnish a return⁶⁶;
• furnishing an incomplete return;
• failing to retain records;
• providing false or misleading particulars, information or evidence; and
• refusing or failing to comply with a notice.⁶⁷

3.77 The five offences listed in the enforcement and prosecutions policy do not reflect the recent changes that were made to Part XX of the Electoral Act.

3.78 In November 2018, the specific offences outlined were repealed and replaced with references to section 137.1 of the Criminal Code Act 1995 (the Criminal Code). Section 137.1 of the Criminal Code makes it an offence to provide false or misleading information or documents. In addition to the referral to the Criminal Code, breaches of the Electoral Act are to be enforced using a civil penalty regime. Civil penalties are outlined in the Regulatory Powers (Standard Provisions) Act 2014, and require the application of the penalty to be sought through the courts.

Findings from compliance reviews

3.79 At the conclusion of a compliance review a final report is issued and is published on the AEC website. The actions that the AEC undertakes to address non-compliance are limited to seeking an amendment to correct the errors identified within the annual disclosure returns submitted by political parties and associated entities. Even where repeat offenders or comprehensive failures in disclosure have been identified, or where the AEC has not been able to make a conclusion on the completeness and accuracy of a return, the AEC has not taken further action to address the non-compliance (see below case studies).

3.80 Across five years of compliance reviews examined by the ANAO, four political parties have been involved in three compliance reviews where repeated non-compliance was found, Australian Greens (South Australia), the Australian Labor Party (Northern Territory) Branch, the Australian Labor Party (Tasmanian Branch) and the Australian Labor Party (Victorian Branch). In each case, the AEC directed the entity to lodge an amendment to correct the non-compliance and did not take any further action such as invoking its investigatory powers under subsection 316(3) of the Electoral Act, or referring the matter to the CDPP.

3.81 Across the five years of compliance review programs examined (2015 through to 2019) the ANAO has identified five cases where the AEC has advised that it was unable to make a conclusion on the accuracy and completeness of an annual return, and one case where control issues were identified.

Enforcement and prosecution

3.82 In all of the five cases where the AEC was unable to make a conclusion on the accuracy and completeness of an annual return, there was no evidence that the AEC had considered undertaking an investigation, through invoking its powers under subsection 316(3) of the Electoral Act to identify the cause/s of the non-compliance and determine if the contravention of the financial disclosure provisions should be referred to the CDPP for potential prosecution. As such, the AEC has not sought to apply a graduated approach to enforcement in line with established best practice, see Figure 3.3.

Figure 3.3: Graduated response to non-compliance

Source: Adapted from ANAO Better Practice Guide — Administering Regulation — June 2014.

3.83 In line with the best practice approach, the first response of the AEC to address non-compliance should be, and is, ‘encouragement’. To do so, the AEC engages with entities and individuals through the issuing of letters and corresponding with entities to encourage voluntary compliance.

3.84 The AEC’s compliance review program enables the AEC to provide directions to entities and individuals that have disclosure obligations. The AEC has limited its use of these directions to requiring entities or individuals to lodge a late return or recommend that an amendment be lodged to correct an error.

3.85 The AEC is able to commence an investigation of contravention or suspected contraventions of the Electoral Act.⁶⁹ Since 2015, the AEC has undertaken two investigations, neither of which were designed to address systemic issues, frequent non-compliances, or matters where the AEC was unable to provide an opinion on the accuracy and completeness of the return, identified through a compliance review. Rather, one investigation was in relation to whether appropriate disclosures were made under Part XX of the Electoral Act in respect of the plane used by Pauline Hanson’s One Nation party during the 2016 federal election.⁷⁰ The second was to determine if Get Up Pty Ltd met the definition of an ‘associated entity’.⁷¹

3.86 The AEC does not have the power to apply administrative penalties to address minor non-compliance (such as failure to provide an election return by independent candidates — those not endorsed by a registered political party — that were unsuccessful in achieving four per cent of the vote and therefore not eligible to receive any election funding). By way of comparison, there are legislative instruments that authorise the AEC to apply administrative penalties to individuals who do not vote.

3.87 In the period examined by the ANAO (from 2015–16), the AEC has prepared briefs for the referral of six cases of non-disclosure to the CDPP for potential prosecution. Each of the six related to the 2016 federal election. The AEC has not referred any matters to the CDPP as a result of findings from compliance reviews since 2016.⁷²

3.88 Out of the six cases from the 2016 election, the AEC advised the ANAO in June 2020 that five were referred to the CDPP:

• one was removed from the prosecutions list by the AEC, as the candidate lodged the election return in December 2017, over 12 months late;
• two were withdrawn and/ or discontinued; and
• two proceeded to prosecution, with a total of $2000 in penalties applied. In both cases, the matter took over 600 days to settle.

3.89 In August 2020, the AEC advised the ANAO that it was taking enforcement action against eleven candidates that did not lodge returns in relation to the 2019 federal election (those returns were due in September 2019).

Appendix 1 Entity response

 

 

 

 

 

 

ANAO comment on the AEC response

1. The ANAO has summarised the legislated disclosure framework (see for example Table 1.1) and has accepted suggestions from the AEC as to where those summaries could be improved. In relation to enforcement cycles, while there has been a considerable delay in the AEC finalising its compliance review program for 2020, the ANAO was able to examine the planning and conduct of reviews over a five-year period spanning 2015 to 2019. The analysis of outstanding returns reflects the ANAO’s analysis of evidence obtained from the AEC, noting that the AEC maintains a view that prior to 2018–19 it was not required to obtain disclosures from political parties that had deregistered during the year (the legislation has been amended ‘to remove doubt’ that deregistered parties do have a reporting obligation).
   
   
   
   The criteria and sub-criteria used to form a conclusion against the audit objective are detailed at paragraph 4 and 5 of the report, and were provided to the AEC at the start of the audit. The basis upon which the ANAO has come to the conclusion that the administration of the scheme is partially effective is detailed at paragraphs 9 to 16.
2. The AEC comments do not accurately reflect the two audit criteria that underpin the audit conclusion. Those criteria address the AEC’s:
   • performance in obtaining timely, accurate and complete returns (see Chapter 2 of the audit report); and
   • compliance monitoring and enforcement activities, with a particular focus on the AEC’s program of compliance reviews, which are the key control the AEC relies upon to assure itself that disclosure returns are complete and accurate (see Chapter 3 of the audit report).
3. Paragraphs 4 and 5 detail the criteria used to make the assessment that the AEC is ‘partially effective’ and Paragraphs 9 to 16 of the audit report outline the key findings underpinning this assessment. The AEC’s approach to using its enforcement powers is one of eight audit sub-criteria. In terms of compliance and enforcement, the more significant audit findings relate to the AEC:
   • significantly reducing the number of planned compliance reviews, narrowing the scope of planned reviews, and reducing the value of the transactions being tested;
   • not undertaking or not completing 35 per cent of planned compliance reviews; and
   • not undertaking a compliance review of any election donor returns or of any annual returns that included no financial disclosures (that is, a nil return). In this latter respect, the 2012 review similarly identified that the AEC’s approach to compliance reviews did not adequately address the risk of non-disclosure, including the potential for secret donations.
4. The ANAO’s conclusions in relation to the AEC’s compliance and enforcement approach are similar to those of a 2012 review commissioned by the AEC (see paragraph 3.4).
5. Chapter 3 of the audit report outlines that the increase in the value of disclosures, the decline in the number of compliance reviews and the declining percentage of the population selected for a compliance review is not supported by an AEC risk assessment demonstrating that the overall risk of non-compliant behaviour has declined. As a result, the AEC is unable to demonstrate that the compliance program in its current form is sufficient to provide assurance that the annual financial disclosures are meeting legislated requirements.
6. The report has been amended to reflect the advice that it is now taking enforcement action against eleven candidates that did not lodge returns in relation to the 2019 Federal election (those returns were due in September 2019).
7. See paragraph 3.79, 3.80 and 3.81 of the report along with case study No.2 and No.3.
8. See paragraphs 3.79, 3.80 and 3.81 along with case study No.2 and No.3.
9. Paragraphs 3.76 to 3.78 identify the changes made to the penalty regime.
10. See paragraphs 3.80, case study 2, paragraph 3.81 and case study 3 of the report.
11. Chapter 3 of the audit report sets out that the AEC is unable to demonstrate that its compliance review program, in its current form, is sufficient to provide assurance that the annual financial disclosure returns are accurate and complete. Similar concerns were raised in a 2012 review which included a finding that the compliance reviews were ‘largely ineffective in identifying apparent deliberate failures to declare significant amounts of money or gifts’ and that ‘it is reasonable to believe that compliance is not complete’.
12. See paragraphs 2.26 to 2.30 of the report. The AEC does not cross-check the value of total receipts, as disclosed by the relevant political parties, or identified as a receipt over the threshold, with the amount of electoral funding provided.
13. See paragraphs 3.56 to 3.58 and Tables 3.4 and 3.5 where the impact of the reduction in the number, value of transactions and size of entity subject to a review have declined are identified and the error rate across the five year period assessed is analysed.
14. The major component of the returns not obtained relates to political parties that deregistered where the AEC did not seek a disclosure for that part of the year for which the party was registered. As identified in the note to Table 2.6, the legislation has been amended not to introduce a new reporting obligation but ‘to avoid doubt’ that a deregistered party had a reporting obligation and the AEC now seeks returns from deregistered parties.
15. It is important that the AEC not only obtains disclosure returns but that those returns be timely. Paragraph 2.12 identifies that the AEC spent, on average, 240 days attempting to contact candidates that had not lodged an election return. Paragraph 2.14 identifies that most annual returns (78 per cent) are received in accordance with the legislated timeframes. Paragraph 2.15 and Table 2.5 of the report identify the number of annual returns that have been submitted late, including the number of entities that submitted returns over 90 days late.
16. See paragraphs 3.22 to 3.29.
17. Paragraphs 3.24 and 3.26 of the report outline the limitations of the risk assessment process used to select entities for a compliance review.
18. The ANAO Insights publication of November 2019 sets out the importance of entities implementing recommendations they agree to. The 2012 McLeod Review reached a similar conclusion to that of this ANAO performance audit (it concluded that the AEC should become more proactive in the way that it seeks to administer and enforce compliance with the financial disclosure scheme) and while each of the four McLeod Review recommendations were agreed to by the AEC it did not proceed to implement three of those recommendations (see Appendix 2 of the audit report).
    
    
    
    Similarly:
    • paragraph 3.25 sets out that the AEC did not implement agreed recommendations from a 2017 review it commissioned of its risk matrix for compliance reviews; and
    • earlier ANAO audit activity identified that the AEC had not adequately and effectively implemented the earlier ANAO recommendations on the conduct of Federal elections (Auditor-General Report No. 6 of 2015–16, Auditor-General Report No. 4 of 2014–15 and Auditor-General Report No. 31 of 2013–14).
19. Obtaining access to specialist expertise was first recommended to the AEC in 2012 (see Appendix 2) and there have been delays in the AEC engaging the additional staff for which it has been provided with additional resources (see paragraphs 3.6 to 3.9).
20. The AEC has not implemented previous recommendations it has accepted to improve its approach to compliance reviews, comprising:
    • a 2012 review that recommended the AEC use its existing powers to extend the scope and depth of its compliance review program (see Appendix 2); and
    • a 2017 review that included eight recommendations to improve the risk matrix it uses to select entities for compliance reviews (see paragraph 3.24).

    In addition, as outlined at paragraphs 3.30 to 3.62, while 78 per cent of returns reviewed by the AEC required amendment the AEC has:

    • significantly reduced the number of planned reviews, narrowed the scope of planned reviews, and reduced the value of the transactions being tested;
    • not undertaken or not completed 35 per cent of planned compliance reviews; and
    • not undertaken a compliance review of any election donor returns or of any annual returns that included no financial disclosures (that is, a nil return).
21. The report has been amended as follows: “Compliance with legislated timeframes has also been an issue, with 22 per cent of annual returns and 17 per cent of election returns lodged after the legislated due date.”
22. See paragraph 2.5.
23. The audit was conducted in accordance with the ANAO Auditing Standards. Consistent with longstanding ANAO practices various opportunities were afforded to the AEC executive to engage with the audit process:
    • at the commencement of the audit, the ANAO informed the Commissioner and Deputy Commissioner of the audit objective, scope as well as the two criteria and sub-criteria being applied. The AEC was invited to provide representations to the ANAO concerning the administration of the financial disclosure scheme in the context of the objective of the audit. The AEC only provided representations in relation to one of the eight sub-criteria.
    • an entry interview was arranged with the AEC. The Commissioner, Deputy Commissioner and First Assistant Commissioner Capability did not attend the entry interview. The Assistant Commissioner of the Disclosure, Assurance and Engagement Branch was in attendance. At no stage during audit fieldwork did the AEC inform the ANAO that the Commissioner, Deputy Commissioner or First Assistant Commissioner sought direct engagement with the audit team.
    • during the conduct of audit fieldwork the ANAO held various discussions with the AEC to understand the disclosure scheme and the AEC’s administration of it. This included meeting with the AEC’s Chief Legal Officer.
    • prior to issuing the Report Preparation Paper (a precursor to the Proposed Report required under s19 of the Auditor-General Act), the ANAO met with the AEC to outline the emerging findings and possible recommendations. The most senior representative present from the AEC was the First Assistant Commissioner Capability.
    • after providing the Report Preparation Paper to the AEC, an exit interview was held. The most senior representative present from the AEC was the First Assistant Commissioner Capability. It was open to the Commissioner and Deputy Commissioner to attend the exit interview.

Appendix 2 Implementation of the McLeod recommendations

1. The below table provides an analysis of the extent to which the McLeod recommendations have been implemented by the AEC.

Appendix 3 List of entities that have not submitted a return as at 30 June 2020

Table A.2: Entities that have not submitted a return as at 30 June 2020

Appendix 4 Methodology to assess the appropriateness of performance information for the compliance review program

Table A.3: Methodology for testing performance measures

Source: Auditor-General Report No.17 2018–19, Implementation of the Annual Performance Statements Requirements 2017–18.

Appendix 5 Glossary