1. The primary purpose of financial statements is to provide relevant and reliable information to users about a reporting entity’s financial position. In the public sector, the users of financial statements include ministers, the Parliament and the community. ‘The objectives of a financial statements audit in the public sector are often broader than expressing an opinion whether the financial statements have been prepared, in all material respects, in accordance with the applicable financial reporting framework. The audit mandate, or obligations for public sector entities, arising from legislation, regulation, ministerial directives, or government policy requirements may result in additional objectives’.¹

2. The ANAO applies these objectives in undertaking financial statements audits and considers areas that may give rise to risks of non-compliance with reporting obligations or risks relating to effectiveness of internal control when planning and performing the audit.

3. The preparation of timely and accurate audited financial statements is also an important indicator of the effectiveness of an entity’s financial management, which fosters confidence in an entity on the part of users.

4. This report provides a summary of the results of the final audits of the financial statements of Australian Government entities and the consolidated financial statements (CFS) as at 30 November 2018. These audit results have been reported to the responsible minister(s) and those charged with governance of each entity.

Consolidated financial statements

5. The CFS present the whole of government and the general government sector financial statements. The 2017–18 CFS were signed by the Minister for Finance and the Public Service on 15 November 2018 and an unmodified auditor’s report was issued on 16 November 2018.

Financial audit results and other matters

Quality and timeliness of financial reporting

6. A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting. Eighty-two per cent of entities delivered their financial statements in line with their financial statement preparation timetable. In addition the number of unadjusted audit differences reported to material entities decreased from 127 in 2016–17 to 57 in 2017–18.

7. The Auditor-General and senior staff under delegation issued auditors’ reports on 240 entities’ 2017–18 financial statements up until 30 November 2018. All auditors’ reports were unmodified. The financial statements were finalised and auditors’ reports issued for 90 per cent of entities within three months of the financial year end. The average time taken for entities to table annual reports from the date the auditor’s report was issued was 43 days.

8. Sixty-four per cent of entities tabled their annual reports before the date of their portfolio’s Senate supplementary budget estimates hearing. This is in line with guidance issued by the Department of Finance which sets out that best practice is to table annual reports prior to the date of Senate supplementary budget estimates. There was an average of 28 days between the accountable authority approving the annual report and tabling of the annual report.

Key audit matter reporting

9. The ANAO has applied ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report for the 26 entities included in Auditor-General Report No. 47 Interim Report on Key Financial Controls of Major Entities and the Australian Government’s CFS. In 2017–18 a total of 59 key audit matters (KAM) were reported across the 26 entities and five KAM were reported in the CFS auditor’s report.

Financial sustainability

10. An analysis of the factors that influence an entity’s financial sustainability can provide an indication of financial management issues or point to an increased risk that entities may require additional government funding. Our analysis concluded that the financial sustainability of the majority of entities was not at risk. Nevertheless, there would be benefit in the government developing performance targets or benchmarks.² This would enable entities to assess their own financial sustainability against agreed parameters over time, and against like entities.

Summary of audit findings

11. A total of 159 findings were reported to entities as a result of the 2017–18 financial statements audits. These comprised one significant, 18 moderate and 140 minor findings. One significant legislative breach was also reported during 2017–18.

12. Eighty-five per cent of significant and moderate findings were in the areas of: management of IT controls, particularly the management of privileged users; compliance and quality assurance frameworks supporting program payments; and the management of non-financial assets.

Executive remuneration reporting

13. In 2016–17 the then Minister for Finance and the Secretary of the Department of the Prime Minister and Cabinet (PM&C) respectively requested government business enterprises (GBEs) and government entities to provide additional information relating to senior management personnel remuneration on their websites.

14. All GBEs complied with the request. The request from the Secretary of PM&C was made to 159 government entities. Of these entities, 145 published the information and 54 published within the requested timeframe.

Developments in financial reporting and auditing frameworks

Changes to the Australian public sector reporting framework

15. There are no significant accounting standards changes for the Commonwealth public sector for 2017–18. Major changes in accounting standards will be applicable in 2018–19 and 2019–20 with the implementation of revised standards for financial instruments, revenue and leases. Early engagement in planning for these standards will provide entities with: more options for transitioning; time to review and potentially renegotiate underlying contracts and agreements; and time to organise and implement necessary financial management information system changes.

16. The Independent Review into the operation of the Public Governance, Performance and Accountability Act 2013 and Rule has made a number of recommendations to the Minister for Finance and the Public Service including: bringing forward the date for the tabling of annual reports; removing duplication and improving linkages between accountability documents; and increasing disclosures around remuneration paid to executives and highly paid staff.

Cost of this report

17. The cost to the ANAO of producing this report is approximately $470 000.

Background

1.1 Government accountability and transparency is supported by the preparation and audit of the Australian Government’s consolidated financial statements (CFS). The CFS and the associated financial analysis provide information to assist users in assessing the financial performance and position of the Australian Government. The CFS is prepared by the Department of Finance (Finance) and issued by the Minister for Finance and the Public Service.

1.2 The CFS presents the consolidated whole of government financial results inclusive of all Australian Government controlled entities, as well as the general government sector (GGS) financial statements. The 2017–18 CFS is prepared in accordance with section 48 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the requirements of the Australian accounting standards, including AASB 1049 Whole of Government and General Government Sector Financial Reporting.

1.3 AASB 1049 requires, with limited exceptions, the principles and rules in the Australian Bureau of Statistics’ Government Finance Statistics (GFS) Manual to be applied where compliance with the GFS Manual would not conflict with Australian accounting standards.

Key areas of financial statements risk

1.4 The ANAO’s 2017–18 audit approach identified key areas of financial statements risk that had the potential to impact the CFS.

Table 1.1: Key areas of financial statements risk

Note a: Figures presented in Table 1.1 may differ from the financial statements of individual entities as a result of: eliminations and adjustments at the CFS level; or where the entities identified contribute a majority to the balance of the financial statement line item.

Note b: These are the main government entities responsible for administration and reporting of Australian Government superannuation liabilities. Liabilities also include schemes managed by other entities, such as the Australian Postal Corporation.

Source: ANAO 2017–18 audit results, and the CFS for the year ended 30 June 2018.

Audit results

1.5 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits of the CFS.

Australian Government’s financial outcome for 2017–18

Operating result

1.6 The following key financial measures were reported for 2017–18:

• net operating balance was a deficit of $8.4 billion (2016–17: deficit of $36.9 billion);
• operating result was a deficit of $4.1 billion (2016–17: deficit of $25.5 billion); and
• comprehensive result (change in net worth) was a total decrease in net worth of $26.1 billion compared to an increase of $22.1 billion in 2016–17.

1.7 The deficits in net operating balance and operating result decreased due to revenue growth (10 per cent), particularly taxation revenues, exceeding the growth in expenses (3.1 per cent).

1.8 The comprehensive result (change in net worth) changed from a surplus to a deficit due mainly to the valuation adjustment on superannuation liabilities, which increased by $25.3 billion in 2017–18 compared to a decrease of $45.9 billion in 2016–17. The movement in the valuation of the superannuation liability is largely due to movements in discount rates and is further discussed at paragraphs 1.15 to 1.22.

Net worth

1.9 The Australian Government’s net worth has changed from a net asset deficiency of $391.7 billion in 2016–17 to $417.8 billion in 2017–18.

1.10 Figure 1.1 provides an analysis of the movement in net worth from 1 July 2017 to 30 June 2018.

Figure 1.1: Total changes in the Australian Government’s net worth in 2017–18

 

 

Source: ANAO analysis of 2017–18 CFS.

1.11 Table 1.2 provides commentary on the main contributors to the change in net worth of the Australian Government identified in Figure 1.1.

Table 1.2: Explanation of key movements in net worth

Source: ANAO analysis of 2017–18 CFS.

1.12 Total liabilities increased during the year as a result of an increase in net debt. Figure 1.2 illustrates the total liabilities and assets of the Australian Government since 2012–13. Three significant components that impact the Australian Government’s total liabilities and total assets are the issue of Government securities, the value of defined benefit superannuation liabilities and investments for policy purposes. These components are discussed in more detail below.

Figure 1.2: Australian Government’s total assets, total liabilities and net worth

 

 

Source: ANAO analysis of 2017–18 CFS.

Government securities

1.13 There has been a steady growth in net debt as a percentage of gross domestic product (GDP). Figure 1.3 illustrates the change in the indicators of the net financial positon of the Australian Government since 2008–09 as a per cent of GDP.

Figure 1.3: Australian Government net financial position (per cent of GDP)

 

 

Source: ANAO analysis of 2017–18 CFS.

1.14 The level of net debt held in Government Securities has grown by $32.2 billion during the year. The growth in net debt has led to increases in net interest payments. Net interest payments increased from $11.4 billion in 2016–17 to $12.2 billion in 2017–18. The low interest rate environment continues to keep the level of increases in net interest payments low as the level of net debt increases.

Superannuation liabilities

1.15 The Australian Government has superannuation liabilities arising from obligations to employees for defined benefit superannuation schemes. Note 10C of the CFS provides information on the nature of these schemes. The total superannuation liability for these schemes was $313.9 billion as at 30 June 2018 ($279.8 billion as at 30 June 2017). The significant balances of the reported liability relate to the following schemes that are closed to new members:

• Commonwealth Superannuation Scheme ($82.9 billion);
• Public Sector Superannuation Scheme ($97.5 billion);
• Military Superannuation Benefits Scheme ($83.3 billion); and
• Defence Force Retirement and Death Benefits Scheme ($46.7 billion).

1.16 The primary reason for the increase in the liability is the fall in the discount rate; between 30 June 2017 and 30 June 2018. The long term nature of the superannuation liability means that small changes to the discount rate can have a large impact on the liability.

1.17 The Future Fund was established by the Future Fund Act 2006 to strengthen the Australian Government’s long-term financial position through the acquisition of financial assets and investments to assist in the discharge of the Australian Government’s superannuation liabilities.

1.18 The Future Fund Board of Guardians is responsible for deciding how to invest the assets of the Future Fund through balancing the risk aspects of each investment mandate to maximise returns.

1.19 As at 1 July 2017, the then Minister for Finance determined the benchmark rate of return on investments of the rate of the consumer price index (CPI) plus 4 to 5 per cent per annum over the long term (2016–17: CPI plus 4.5 to 5.5 per cent). Over the last ten years the returns of the Future Fund have exceeded the benchmark return.

1.20 Figure 1.4 provides an overview of the balances of the Australian Government superannuation liabilities, the net investment balance of the Future Fund and the target asset level (TAL) from 2012–13 to 2017–18.

Figure 1.4: Total value of Australian Government superannuation liabilities and Future Fund investments; and the target asset level

 

 

Source: ANAO analysis of 2017–18 CFS.

1.21 The TAL represents the best estimate of the Future Fund balance required to offset the projected unfunded superannuation liabilities.

1.22 Figure 1.4 shows that the 2017–18 estimate of the TAL is $180.2 billion³, which is above the current Future Fund net asset balance of $145.8 billion. It should be noted that similar to the superannuation liabilities, the TAL is sensitive to the assumed rate of return for the Future Fund. The Future Fund Act 2006 permits drawdowns, to fund superannuation payments, from 1 July 2020 or when the balance of the Future Fund equals or exceeds the TAL. However, in 2017, the Government announced it would delay drawdowns from the Future Fund until at least 2026–27.

Note a: The Joint Committee of Public Accounts and Audit Report 463: Commonwealth Financial Statements – Inquiry based on Auditor-General’s report 33 (2016–17) paragraph 2.36 recommended that ‘the Department of Finance, in consultation with the Australian National Audit Office, work to: develop appropriate and robust performance targets or benchmarks, which can be publicly reported, to enable Commonwealth entities to assess their own financial sustainability against agreed parameters over time and against like entities’

Introduction

2.1 The ANAO publishes an Annual Audit Work Program (AAWP) which reflects the audit strategy and deliverables for the forward year. The purpose of the AAWP is to inform the Parliament, the public and government sector entities of the planned audit coverage for the Australian Government sector by way of financial statements audits, performance audits and other assurance activities.

2.2 The financial statements audit coverage, as outlined in the AAWP includes presenting two reports to the Parliament addressing the outcomes of the financial statements audits of Australian Government entities and the consolidated financial statements of the Australian Government (CFS). These reports provide Parliament with an independent examination of the financial accounting and reporting of public sector entities.

2.3 This report presents the final results of the 2017–18 audits of the CFS and 240 Australian Government entities. Auditor-General Report No.47 2017–18 Interim Report on Key Financial Controls of Major Entities (Auditor-General Report No.47), focused on the interim results of the audits of 26 entities. This included a review of the governance arrangements related to entities’ financial reporting responsibilities and an examination of the relevant internal controls, including information technology system controls, that supported the preparation of financial statements that are free from material misstatement.

Summary of 2017–18 auditors’ reports

2.4 The Auditor-General is required to complete the financial statements audits of all Australian Government entities and their controlled subsidiaries on an annual basis.⁴

2.5 Table 2.1 is a comparison of the number and type of auditors’ reports issued by the Auditor-General and his delegates in 2016–17 and 2017–18 (as at 30 November 2018), including the CFS. Appendices 3 and 4 explain in more detail the financial reporting frameworks applicable to the Australian Government and the form and content of auditors’ reports.

Table 2.1: Summary of auditors’ reports issued and outstanding

Note a: As at 30 November 2018 IBA Tourism Asset Management Pty Ltd had not finalised the 2017–18 financial statements.

Note b: As at 30 November 2018 the Minjerribah Camping Partnership was the only entity which had not finalised their 2016–17 financial statements. All other entities have finalised their financial statements for 2016–17.

Source: 2016–17 and 2017–18 ANAO auditors’ reports.

Internal control environment

2.6 The ANAO uses the framework in ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment to consider the impact of elements of an entity’s internal controls supporting the preparation of financial statements. This approach provides a basis for designing and implementing responses to the assessed risk of material misstatement. Figure 2.1 outlines these elements.

Figure 2.1: Elements of entity internal controls

 

 

Source: ASA 315 Identifying and assessing the risk of material misstatement through understanding the entity and its environment, paragraph A58.

2.7 In assessing the effectiveness of an entity’s control environment that supports the preparation of financial statements the ANAO, examines aspects of entities’ governance structures. The ANAO considers whether management has established frameworks and processes that promote positive attitudes, awareness and actions concerning the entity’s internal controls and their importance to the entity. The main elements reviewed include: governance structures relevant to the preparation of the financial statements; audit committee and assurance arrangements; and systems of authorisation, recording and procedures.

2.8 An effective internal control framework provides a level of assurance that entities are able to prepare financial statements that are free from material misstatement. At the completion of the final audits, for the majority of entities, key elements of internal control were operating effectively to provide reasonable assurance that the entities were able to prepare financial statements that are free from material misstatement. For thirteen entities⁵, except for particular finding(s) outlined in chapter 4, the key elements of internal control were operating effectively to support the preparation of financial statements that are free from material misstatement.

2.9 Information and communication includes the processes and policies that support the provision of relevant and timely internal and external information supporting reliable financial reporting and decision making. Entities establish and monitor budgets throughout the financial year to assist in decision making at the entity level with budgets consolidated at the whole of government level. The publication of the budgetary information provides details of forecast financial performance and the government’s fiscal policy for the forward years.

2.10 AASB 1055 Budgetary Reporting requires not-for-profit entities within the general government sector to disclose the original budgeted financial statements presented to Parliament together with explanations of major variances between the actual amounts reported in the financial statements and the corresponding original budget figures.

2.11 When providing explanations regarding budget variances, the Department of Finance has provided entities with the following guidance relating to what is considered a material or major variance:

• more than +/- 10% of the line item for both departmental and administered; or
• more than +/- 2% of total expenses or total own-source revenue for departmental only; and
• more than +/- 2% of the relevant sub-total for total expenses, revenue, assets or liabilities for administered only.⁶

2.12 The ANAO has reviewed the budgetary reporting requirements of material entities for 2017–18. The Department of Finances guidance in relation to variance thresholds was applied by all entities with the exception of five entities. These five entities applied a more conservative variance threshold when identifying major variances for explanation.

2.13 The ANAO audits the appropriateness of explanations provided for major variances however, is not required to audit budgetary values. The review noted that there are a number of items that entities generally do not budget for as part of the annual government budget process. These typically include costs associated with assets (asset write-down and impairment of assets and changes in the asset revaluation reserve). The variance explanations generally provided a high level analysis of the movements.

Quality and timeliness of financial reporting

2.14 The primary purpose of financial statements is to provide relevant and reliable information to users about a reporting entity’s financial position. In the public sector, the users of financial statements include ministers, the Parliament and the community. ‘The objectives of a financial statements audit in the public sector are often broader than expressing an opinion whether the financial statements have been prepared, in all material respects, in accordance with the applicable financial reporting framework. The audit mandate, or obligations for public sector entities, arising from legislation, regulation, ministerial directives, or government policy requirements may result in additional objectives’.⁷

2.15 The ANAO applies these objectives in undertaking financial statements audits and considers areas that may give rise to risks of non-compliance with mandatory reporting requirements or risks relating to effectiveness of internal control when planning and performing the audit. Financial statements preparation is often a complex task, involving compliance with a large number of requirements established by Australian accounting standards and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the FRRs).

2.16 In order to provide relevant and reliable financial information to the users, entities should prepare quality financial statements in a timely manner supporting entities ability to meet legislative reporting obligations including tabling of annual reports. The preparation of quality financial statements will be evidenced by adherence to a well-defined financial statements preparation timetable with minimal adjustments required to their financial statements throughout the audit process.

Quality of financial statements preparation

2.17 A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting. Poor project management or processes, coupled with tight timeframes, heightens the risk of error in the financial statements.

2.18 In 2017–18, the ANAO analysed the timeliness of financial statements preparation and the number of unadjusted audit differences. A timeframe was established by entities and agreed with audit teams for the delivery of financial statements.

2.19 Financial statements were delivered in line with the agreed timeframes for 82 per cent of entities, with a further nine per cent delivered within one week. The remaining nine per cent of entities delivered their financial statements on average within 14 days of the agreed timeframe.

Unadjusted audit differences

2.20 Throughout the financial statements audit process all audit differences other than those considered to be clearly trivial are communicated to entities. In the ANAO’s view all audit differences accumulated during the course of the audit should be adjusted.

2.21 At the completion of the 2017–18 financial statements audits there were a total of 91 unadjusted audit differences reported to entities. Of these unadjusted differences, 57 related to material entities. In 2016–17, material entities had 127 unadjusted differences. The ANAO considered the unadjusted audit differences, individually and in aggregate, did not result in a material misstatement to the financial statements of entities.

2.22 Overall, financial statements were prepared to a high standard. All entities are encouraged to maintain their commitment to the preparation of timely and accurate financial statements as a key element of their financial management responsibilities. Financial statements project management will be increasingly important if there is a move to bring forward annual report tabling timeframes in the future.

Timeliness of financial reporting

2.23 The timely preparation and publication of annual audited financial statements is a key means by which entities meet their financial accountability and legislative obligations.

Figure 2.2: Timeframes for financial statements signing from end of financial year.

 

 

Source: ANAO analysis of issued auditors’ reports

2.24 As shown in Figure 2.2, there has been improvement in the percentage of financial statements signed and associated auditor’s report issued within two months of the reporting year end (2017–18: 32 per cent compared to 2016–17: 28 per cent). The percentage of financial statements signed and associated auditor’s report issued within three months also improved from 87 per cent to 90 per cent. The ANAO issued 99 per cent (2016–17: 100 per cent) of auditors’ reports within two business days of the signing of the financial statements by the accountable authority.

2.25 Annual reports inform the Parliament, other stakeholders and the community about the performance of entities. Of the 241 mandated financial statements audits, 181 entities are required to present annual reports to the responsible minister for tabling in the Parliament.

2.26 The PGPA review⁸ is proposing earlier tabling of annual reports. If this is introduced entities may need to bring forward their preparation of financial statements.

2.27 Figure 2.3⁹ shows the time in days from the date the auditor’s report was issued to the:

• approval of the annual report by the accountable authority; and
• tabling of the annual report in Parliament.

Figure 2.3: Timeframe for tabling annual reports from issuance of auditor’s report

 

 

Source: ANAO analysis

2.28 The Resource Management Guide 135 Annual report for non-corporate Commonwealth entities (RMG 135) section 14¹⁰ states that annual reports are to be provided to the relevant minister by the 15^th day of the fourth month after the end of the reporting period. Annual reports are approved by the entity’s accountable authority prior to being provided to the minister and tabled in Parliament.¹¹

2.29 The analysis shows that 54 per cent of the annual reports were approved by the accountable authority within 10 days of the auditor’s report being issued compared to one per cent of annual reports tabled. On average the time between issuance of the auditor’s report and the approval of the annual report by the accountable authority was 15 days. The average days between the accountable authority’s approval of the annual report and tabling in Parliament was 28 days.

2.30 Twenty eight per cent of annual reports were tabled within 30 calendar days of the auditor’s report being issued. The average time taken to table annual reports was 43 days after the issuance of the auditor’s report. There were seven entities that tabled their annual reports between 81 and 110 days after their auditor’s report was issued.¹²

2.31 Annual reports should be tabled in Parliament early enough to allow sufficient time for review prior to Senate supplementary budget estimates hearings. RMG 135 section 18 provides guidance that it is best practice for annual reports to be tabled prior to supplementary budget estimates hearings if they occur prior to 31 October.

Figure 2.4: Annual report tabling date in relation to Senate supplementary budget estimates hearing

 

 

Source: ANAO analysis

2.32 Figure 2.4 shows that, in line with best practice, 64 per cent of entities tabled their annual report prior to the date of the relevant supplementary budget estimates hearing date. A further five per cent tabled on the date of their portfolio’s hearing. There were 13 material entities across five portfolios which tabled annual reports after the portfolio’s Senate supplementary budget estimate hearing date as listed in Table 2.2.

Table 2.2: Annual reports tabled after the portfolio’s Senate supplementary budget estimate hearing

Note a: The date of the accountable authority’s approval of the annual report is taken as either the date on the transmittal letter or the date the board approved the annual report.

Note b: This is the first appearance for the portfolio at the 2018–19 Supplementary Budget Estimates hearing.

Key audit matters

2.33 ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701) was applicable from 2016–17. While ASA 701 only requires key audit matters (KAM) reporting for listed entities, the Auditor-General considers KAM reporting to be better practice for financial statements auditing. The Auditor-General adopted KAM reporting in 2016–17 and has continued to report KAM in 2017–18 for the 26 entities included in Auditor-General Report No. 47 and from 2017–18, the CFS.

2.34 The entities for which KAM reporting was adopted in addition to the Consolidated financial statements are:

• Attorney-General’s Department;
• Australian Office of Financial Management;
• Australian Postal Corporation;
• Australian Taxation Office;
• Departments of: Agriculture and Water Resources; Communications and the Arts; Defence; Education and Training; the Environment and Energy; Finance; Foreign Affairs and Trade; Health; Human Services; Home Affairs; Industry, Innovation and Science; Infrastructure, Regional Development and Cities; Jobs and Small Business; Parliamentary Services; Prime Minister and the Cabinet; Social Services; the Treasury; and Veterans’ Affairs;
• Future Fund Management Agency and the Board of Guardians;
• National Disability Insurance Agency;
• NBN Co Limited; and
• Reserve Bank of Australia.

2.35 Further details regarding each of these entities’ individual KAM are provided in Chapter 4 of this report.

2.36 The purpose of communicating KAM is to provide greater transparency about the audit that was performed. Communicating KAM helps users of financial statements better understand those matters that, in the auditor’s professional judgement, were of the most significance in the audit of the financial statements. The audit opinion is made in respect of the financial statements as a whole. Accordingly, the description of KAM does not provide a separate conclusion on the matter being described nor does it imply that the matter has been appropriately resolved in forming the overall opinion.

2.37 In 2017–18 a total of 59 KAM were reported across the 26 entities. The number of KAM per entity ranged from one to four. A number of factors were considered in determining KAM including reliance on third parties for data and balances that are underpinned by significant judgements and assumptions.

2.38 The majority of KAM reported in 2017─18 related to the valuation assertion in respect of assets and liabilities such as:

• loans and other receivables;
• property plant and equipment;
• investments;
• intangibles;
• provisions; and
• concessional loans.

2.39 Other KAM included completeness and accuracy of revenue and expenses for benefits payments and other payments.

2.40 The ANAO also reported on KAM in the auditor’s report for the CFS. There were five KAM identified which have been reported in Table 1.1.

2.41 Auditors’ reports are made public through their inclusion in Commonwealth entities’ annual reports. Through the use of KAM the ANAO is able to draw the reader’s attention to those matters, which in our professional judgement, were of the most significance in the audit of the financial report of the current period. Key audit matters, do not of themselves, provide a separate opinion on items in the financial report. The auditor’s report does however include a summary of how the key audit matter was addressed.

2.42 The benefits of KAM reporting to users of the financial statements was demonstrated during 2018 following a request from two parliamentarians for the ANAO to undertake an assurance review of NBN Co Limited (NBN). A number of requests are received annually from parliamentarians to undertake audits or reviews into particular matters. In this instance the request was to undertake an assurance review of the financial assumptions underpinning the long term economics of the NBN. As the matter had been considered and incorporated into a reported KAM, in responding to the request the ANAO was able to refer the parliamentarians to our opinion on NBN’s 2016–17 financial report which provided detail of work that had been undertaken and considered in reaching our conclusion.

Financial Sustainability

2.43 Integral to an audit is an understanding of an entity and its environment, including an entity’s financial sustainability. Financial sustainability measures the ability of an entity to manage its financial resources so it can meet present and future spending commitments. This can provide an indication of financial management issues or can point to an increased risk that entities may require additional government funding.

2.44 The ANAO developed parameters based on generally accepted concepts of financial sustainability and applied these to the operating results and balance sheets of the 65 material entities. These parameters¹³ are described in Table 2.3 and Table 2.4 below.

Analysis of operating results

2.45 The responsibilities of Australian Government entities are established by legislation, or determined by government, and include responsibilities for functions such as policy development, regulatory oversight and/or service delivery. In performing these responsibilities, entities are expected to manage efficiently and effectively the public resources made available to them.

2.46 A key measure of an entity’s financial management is its operating result for the year. Although the operating result is not the sole measure of performance of a public sector entity, a history of large deficits or surpluses in a not-for-profit Commonwealth entity could suggest the need for additional or refocused funding, elimination of non-value adding costs, and/or improved financial management.

2.47 Similarly in the case of for-profit entities and those with quasi-commercial operations, there is an expectation that financial management focuses on meeting expected returns.¹⁴ As a result, any entity in this category averaging a large deficit should be considered more closely.

2.48 Against this background, the ANAO analysed the operating results of all material entities over a five year period: 2013–14 to 2017–18. This analysis is based on reported surpluses or deficits after adjusting for unfunded expenses¹⁵, where relevant, highlighting the full cost of operations. Of the 65 entities considered in this analysis, 43 are not-for-profit and 22 are for-profit or not-for-profit entities which have quasi-commercial operations or departmental functions operating on a for-profit basis.

2.49 Material entities are grouped into three operating result categories as part of this analysis, outlined in Table 2.3 below.

Table 2.3: Operating result categories

Source: ANAO developed parameters.

2.50 Figure 2.5 demonstrates 49 per cent material not-for-profit entities were classified as achieving small deficits or surpluses and managing within their breakeven mandate. Seventy-three per cent for-profit/quasi-commercial entities recorded average large surpluses.

Figure 2.5: Operating results analysis

 

 

Source: ANAO analysis of material entities’ operating results.

2.51 Eighteen per cent of for-profit and 11 per cent of not-for-profit entities have averaged large deficits and 40 per cent of not-for-profit entities have averaged large surpluses. The following discussion focuses on the common drivers for these entities’ large average surpluses and large average deficits.

Large average deficit

2.52 For the period 2013–14 to 2017–18 the following for-profit entities recorded large deficits: Moorebank Intermodal Company Limited; NBN Co Limited; Australian Naval Infrastructure Pty Ltd, and WSA Co Ltd. All four entities are in the build phase of large infrastructure projects, requiring significant investment which has led to their operating losses.

2.53 Five not-for-profit entities being the Australian Broadcasting Corporation, Australian Federal Police, Department of Industry, Innovation and Science, the High Court of Australia and the National Capital Authority also recorded a large average deficit during the period.

2.54 The large average deficits of the Department of Industry, Innovation and Science and the High Court of Australia (High Court) were driven by asset write-offs and transfers. In 2013–14, the High Court wrote-off a significant component of their library collection which resulted in a large average deficit for the period. The High Court’s operating result from 2014–15 to 2017–18 reflected an average surplus of two per cent driven by the transfer of assets from the Law Courts Ltd in 2016–17. As part of the ‘Maintaining Australia’s Optical Astronomy Capability’ measure announced in the 2017–18 budget, the Department of Industry, Innovation and Science transferred the Australian Astronomical Observatory functions to the Australian National University and Macquarie University resulting in significant asset write-offs.

2.55 The Australian Federal Police reported a significant deficit in 2017–18 which contributed to a higher average deficit overall. The significant deficit was due to: the impact of increases in staff costs arising from the 2017–18 enterprise agreement; additional operational costs to address security threats; and a technical accounting adjustment in relation to the recognition of appropriations.

2.56 Other one-off factors have resulted in significant deficits in 2017–18 contributing to a higher average over the five year period. In 2017–18, the operating result of the Australian Broadcasting Corporation was affected by the initial recognition of a building maintenance provision of $30.7 million as a result of a Building Code of Australia Fire Safety Standards review. The operating loss for the National Capital Authority largely related to works on the National Police Memorial, where insurance funds were received (and recognised in the financial statements) in 2015–16 but the majority of the work was undertaken in 2017–18.

Large average surpluses

2.57 As outlined in Figure 2.5, 40 per cent of material not-for-profit entities reported average surpluses of more than one per cent of total expenses over the period of analysis. The following discussion focuses on the common drivers for these entities’ large average surpluses.

2.58 Cultural institutions represented approximately a quarter of the entities in the large average surplus category.¹⁶ The receipt of goods or donations for no or nominal consideration and bequests of cash are factors impacting the average surplus. Cultural institutions frequently receive gifts of heritage and/or cultural items for their collections. The accounting recognition of these items results in revenue being recorded in the period they are received without a corresponding expense. The outcome is that the receiving entity records a significant surplus in those years, affecting the average over the longer term.

2.59 The Department of Communications and the Arts’ operating result was impacted by the transfer of a leasehold fit-out asset from the Department of Industry, Innovation and Science on 1 July 2017. The accounting recognition of these items results in revenue being recorded in the period they are received without a corresponding expense affecting the average over the longer term.

2.60 Machinery of government changes can significantly impact the operating result of an entity in any year, including the periods immediately following the changes. Three entities were in this category in 2017–18 as they were impacted by transfers of functions and associated funding due to machinery of government changes during the five year period. Those entities were: the departments of: Infrastructure, Regional Development and Cities; Jobs and Small Business; and the Federal Court of Australia. For these entities the timing of the machinery of government changes and the transfer of funding associated with those functions did not align with the related expenditure.

2.61 The timing of events or project milestones may also affect the operating result of an entity in a particular year. This has been a factor impacting the average operating result of the Australian Electoral Commission, the Australian Research Council and the Department of Human Services. These entities have recognised significant surpluses over the period due to the timing and recognition of revenue due to events or project milestones not aligning with the related expenditure.

2.62 The Australian Prudential Regulation Authority’s (APRA) significant surplus was a result of levies in excess of costs in 2017–18. The relevant minister determines the levy rates for each regulated industry prior to the beginning of each financial year. The increase in levies payable to APRA for 2017–18 for its operations was to coincide with expected increases in staff numbers and depreciation expenses attributable to acquiring assets. In 2017–18 the increased employee numbers and acquisition of assets did not materialise as anticipated.

2.63 The Department of Agriculture and Water Resources also reported a significant surplus in 2017–18 due to increased collections from cost recovery arrangements. The department operates a number of cost recovery arrangements across the biosecurity, export certification and other business services areas. The department maintains a separate industry reserve for each cost recovered program. Where the costs from these programs exceed revenue, the shortfall is first met from the individual industry reserve.¹⁷

2.64 The Australian Office of Financial Management (AOFM) has reported in each of their last five annual reports that their surpluses over the past five years are largely due to the AOFM incurring lower than anticipated operating expenses.¹⁸

2.65 The transition of participants to the National Disability Insurance Scheme (NDIS) and the utilisation of supports has impacted the operating result of the National Disability Insurance Agency over the period. There has been a slower phasing of participants than anticipated and lower utilisation of funds by participants which resulted in expenses incurred in 2017–18 being less than was budgeted for. The cost of the scheme will increase as the utilisation of committed supports within the scheme increases.¹⁹

2.66 Other one-off factors have resulted in significant surpluses in 2017–18 resulting in a higher average over the five year period. The Australian Securities and Investments Commission (ASIC) recorded a surplus driven mainly by court cost recoveries arising from settlements with the Australia and New Zealand Bank and National Australia Bank over unconscionable conduct²⁰ in respect of the Bank Bill Swap Rate. This led to ASIC recognising revenue associated with court cost recoveries of approximately $34.1 million in 2017–18, compared to $2.4 million in 2016–17. The Bureau of Meteorology also recorded a surplus in relation to the accounting treatment of the initial recognition of heritage assets and plant and equipment assets relating to the Bureau of Meteorology’s National Meteorological Library collection.

Balance sheet analysis

2.67 All entities are expected to actively manage their underlying financial position, maintaining asset levels to support their operations and ensuring that sufficient funds will be available to meet liabilities as they fall due.

2.68 The ANAO analysed the balance sheet positions of material Australian Government entities as at 30 June 2018. While it is necessary to have regard to the public sector context, the following two measures are generally accepted indicators of the soundness of entities’ balance sheets:

• Liquidity: the extent to which an entity’s liabilities are covered by cash or other financial assets. An entity where liabilities significantly exceed its financial assets may need a future injection of cash from government to meet those liabilities.
• Gearing: the extent to which an entity’s total assets are funded by debt rather than equity. An entity with high gearing may be running down its asset base that could indicate the need for a future capital injection from government.

2.69 Material entities have been grouped into the following categories:

Table 2.4: Balance sheet categories

Source: ANAO balance sheet categories.

2.70 Figure 2.6 presents the number of entities in each balance sheet category from 2014–15 to 2017–18.

Figure 2.6: Balance sheet analysis

 

 

Source: ANAO analysis of entity balance sheets.

2.71 Seventy-five per cent (2016–17: 75 per cent) of material entities had strong balance sheets in 2017–18. This indicates that the balance sheet positions of the large majority of material entities remain sound.

2.72 The entities with weak balance sheets are those whose operations are dependent on government policy and on continued funding by the Parliament. On this basis, and provided that appropriate attention is given to liquidity issues in the future, these entities are not at high risk of experiencing liquidity problems. From the period 2014–15 to 2017–18, one entity, the Australian Taxation Office (ATO), had a weak balance sheet over the period.

2.73 The ATO’s liquidity ratio has remained relatively stable, averaging 42 per cent, for the past four years. The gearing ratio declined in the current year due to the operating loss which was offset against existing reserves. This decline in the gearing ratio was also attributed to the lapsing of annual appropriations.

2.74 In 2016–17 the Department of Health was also in a weak balance sheet category. The department experienced a significant loss in 2016–17 which significantly impacted the gearing ratio as the loss was required to be offset against existing reserves. In 2017–18, the department reported a surplus driven by additional revenues in the form of inspections, applications, conformity assessment and evaluations in the Therapeutic Goods Administration and higher revenue from new chemicals assessments in the National Industrial Chemicals Notification and Assessment Scheme. The department also recorded a reduction in employee expenses. These factors have resulted in an improvement in the department’s gearing ratio in the current year, which increased to 21 per cent.

2.75 The Department of the Environment and Energy consistently reported a weak balance sheet arising from the unfunded provision for restoration obligations in the Antarctic in prior years. In 2017–18, the department’s gearing ratio improved to 28 per cent due to increases in asset values as a result of the department’s revaluation of non-financial assets. The revaluation surplus, coupled with equity injection funding by the Government to build a new science and resupply icebreaker ship for Antarctic operations, has also resulted in an improvement to the gearing ratio in 2017–18.

Executive remuneration reporting

2.76 Entities have been requested to continue reporting executive remuneration in 2017–18 consistent with requests made in 2017. In February 2017, the then Minister for Finance wrote to the boards of government business enterprises (GBE) and the Future Fund Management Agency and the Board of Guardians (FFMA) requesting the entities to make public remuneration packages of individuals who constitute the executive management for the 2015–16 reporting period. These entities were requested to continue this reporting in future annual reports. All entities complied with this request in 2017–18.

2.77 In May 2017, the Secretary of the Department of the Prime Minister and Cabinet wrote to portfolio secretaries inviting them to publish on their website relevant information relating to the entity’s remuneration of all executives and other highly paid staff each financial year for the 2016–17 reporting period and future periods. The Secretary also requested the assistance of portfolio secretaries in requesting the same reporting by all other entities and companies within their portfolio and that efforts be made to publish the information by 31 July each year.

2.78 The ANAO examined²¹ the executive remuneration reporting of 159 entities²² in light of these requests. The ANAO considered whether the entity had published the requested information and when it was published.²³ Table 2.5 provides a summary of the results.

Table 2.5: ANAO analysis of entities’ 2017–18 executive remuneration reporting

Source: Entities’ annual reports, websites and/or as advised by the entity.

2.79 Table 2.5 shows that one material and 13 non-material entities did not publish executive remuneration information. These entities advised that this was due to:

• privacy considerations;²⁴ and
• current reporting in the financial statements which is separately provided on the website, was considered adequate.²⁵

Figure 2.7: Timeliness of executive remuneration reporting by entities.

 

 

Source: ANAO analysis of entity websites and information provided by entities.

2.80 Of the 145 entities that published the information, 54 entities (approximately 38 per cent) published the information by 31 July and a further 41 (approximately 29 per cent) published in August.

2.81 The Secretary’s letter requested the information be disclosed permanently on the websites of entities using a standardised reporting format. The guidance suggested disclosure of remuneration at an aggregate level within dollar ranges (or bands) providing the number of employees within each band. The guidance noted that the format may need to be adjusted to take into consideration privacy matters. The format requested the average, by band, for the following components: reportable salary; contributed superannuation; allowances; bonuses paid; and the total remuneration.

2.82 There were six entities that did not comply with the guidance issued. Four entities did not provide a breakdown of the components within the remuneration package.²⁶ Two entities only included remuneration relating to their boards, other executives were not published due to privacy considerations.²⁷

2.83 Remuneration disclosures on entities’ websites do not form part of the financial statements. The disclosures provide additional information on matters not required in financial statements, where an independent audit is mandatory.

Audit findings

2.84 Audit findings are raised in response to the identification of a potential business or financial risk posed to an entity. Often these risks arise from deficiencies within entity’s internal control processes or frameworks. Weaknesses in internal controls increase the possibility that a material misstatement of an entity’s financial statements will not be prevented or detected in a timely manner. The ANAO rates audit findings according to the potential business or financial management risk posed to the entity. The rating scale is presented in Table 2.6.

Table 2.6: Audit findings rating scale

Source: ANAO reporting policy.

2.85 A summary of findings identified for the period ended 30 June 2018 by category is presented in Table 2.7.

Table 2.7: Audit findings by category for the period ended 30 June 2018

Source: ANAO compilation of findings.

2.86 Two legislative breaches were reported during 2017–18. Of these, one was significant and one non-significant.²⁸ The significant legislative breach was reported to the Northern Land Council and is not included in the table above. Further details regarding the significant breach can be found in Chapter 4, paragraphs 4.16.35 to 4.16.39.

Information Technology control environment

2.87 Figure 2.8 demonstrates the trend in audit findings related to entities’ IT control environments from 2015–16 to 2017–18. There is a decrease both in overall findings and the number of moderate findings. The most common area of weakness across all findings continues to relate to security management, in particular, the management of user access and monitoring of privileged users.²⁹ A lack of controls around privileged users increases the risk of unauthorised changes being made to systems and data, or unauthorised data leakage and is an area requiring sustained focus by entities.

Figure 2.8: IT control environment audit findings 2015–16 to 2017–18

 

 

2.88 Three of the moderate findings remained unresolved from the prior financial year.³⁰ Two moderate findings were raised during 2017–18, one of which was a minor audit finding and was upgraded due to issues that remained unaddressed from the prior year.³¹

Compliance and quality assurance frameworks

2.89 Entities place reliance on internal and external systems, parties and information in decision-making processes. The implementation of effective compliance and quality frameworks and processes, provide assurance over the completeness and accuracy of information and is integral to the preparation of financial statements that are free from material misstatement.

2.90 Figure 2.9 outlines trends in findings related to compliance and quality assurance frameworks identified between 2015–16 and 2017–18.

Figure 2.9: Compliance and quality assurance framework audit findings 2015–16 to 2017–18

 

 

2.91 The significant audit finding in 2016–17 related to the National Disability Insurance Agency: Business Assurance – Compliance Program, first raised in 2015–16. This was downgraded to a moderate audit finding as part of the 2017–18 interim audit and remains unresolved. Further details can be found in the National Disability Insurance Agency section in Chapter 4.³²

2.92 Of the six remaining moderate audit findings unresolved in 2017–18, five were first reported in 2017–18 and related to weaknesses in: assurance processes over information sourced from third parties; quality assurance processes supporting financial statement preparation; and risk management practices relating to loan facilities. One moderate finding relating to the National Disability Insurance Agency: Streamlined Access to Scheme – Defined Programs was first reported in 2016–17 and remains unresolved.³³ Further details of the resolved audit findings can be found in the respective entity’s section in Chapter 4.³⁴

2.93 The weaknesses in this category related to:

• financial statement preparation processes;
• quality assurance over data integrity and program payments; and
• design and documentation supporting third party arrangements.

2.94 There remains a need for entities to focus on risk management processes to support the effective engagement with risk in the delivery of programs. In particular, the implementation, documentation and consistent application of risk management processes.

Accounting and control of non-financial assets

2.95 Entities control a diverse range of non-financial assets on behalf of the Commonwealth, including land and buildings, specialist military equipment, leasehold improvements, infrastructure, plant and equipment, inventories and internally-developed software.

Figure 2.10: Accounting and control of non-financial assets audit findings 2015–16 to 2017–18

 

 

2.96 One new significant audit finding was reported in 2017–18 relating to the Department of Defence’s management and monitoring of specialist military equipment and inventory balances.³⁵

2.97 Of the three moderate audit findings open at 2017–18, two were first reported in 2017–18 and one was unresolved from the prior year. The remaining findings reported in 2016–17 have been resolved. The open moderate findings reported in 2017–18 relate to weaknesses in: asset and inventory management including impairment processes.³⁶

2.98 The weaknesses in this category related to entities’ processes for:

• monitoring of assets under construction and capitalisation of project costs;
• valuation adjustments; assessments for impairment of assets and restoration obligations;
• data management and integrity;
• inventory management; and
• stocktake procedures.

Revenue, receivables and cash management

2.99 Revenue and receivables consists of Parliamentary appropriations, taxation revenue, customs and excise duties and administered levies. Revenue is also generated by entities from the sale of goods and services and a range of other sources. Cash management involves the collection and receipt of public monies and the management of official bank accounts.

Figure 2.11: Revenue, receivables and cash management audit findings 2015–16 to 2017–18

 

 

2.100 Consistent with 2016–17, there are no significant or moderate audit findings reported in this category. The number of minor findings has reduced from 24 to 16. Three minor findings have been outstanding for more than one year of which two have been unresolved for two years and one unresolved for three years.

2.101 The weaknesses in this category include:

• recognition of revenue arising from multi-year contracts;
• bank reconciliation processes, including the timeliness of those reconciliations; and
• processes supporting the complete and accurate recording of revenue.

Human resources financial processes

2.102 Human resources encompass the day-to-day management and administration of employee entitlements and payroll functions. Employee benefits expenditure represents the largest departmental expenditure item for most entities. Employee entitlement liabilities involve estimates and judgements in inputs. It is important for entities to establish robust controls in these areas to support complete and accurate payment and recording of transactions.

Figure 2.12: Human resources financial processes audit findings 2015–16 to 2017–18

 

 

2.103 Two moderate audit findings were first reported in 2017–18. The findings relate to quality assurance and controls over human resource processes.³⁷

2.104 There has been an increase in the number of minor audit findings reported over the past three years. Human resource transactions are high volume and low value in nature. As a result, management relies on effective and well-designed manual and automated controls. Unaddressed control weaknesses can result in systematic errors increasing the risk of material misstatement.

2.105 Nine minor findings have been unresolved for at least two years. Of these, one has been unresolved for three years.

2.106 The findings in this area related to weaknesses in:

• quality assurance over services provided by third parties;
• appropriate segregation of duties; and
• appropriate review and approval processes supporting changes to human resources data.

Purchases and payables management

2.107 Purchases and payables are payments to, or due to, suppliers including contractor and consultancy expenses, lease payments and general administrative payments. These typically comprise the second most significant departmental expenditure item of entities after employee benefits.

Figure 2.13: Purchases and payables management audit findings 2015–16 to 2017–18

 

 

2.108 As demonstrated by Figure 2.13 above, there are limited findings in this category which indicates that controls in this area are well established. Of the eight minor audit findings unresolved at 2017–18, one is unresolved from 2016–17.

2.109 The most common weaknesses between 2015–16 and 2017–18 are:

• procurement and contract management;
• processes supporting the authorisation of expenditure, including maintaining proper segregation of duties;
• accrual management; and
• maintenance of vendor records and payment controls.

Contractor and consultant expenses

2.110 The ANAO considered the financial statements of the 26 entities included in Auditor-General Report No 47 Interim Report on Key Financial Controls of Major Entities. The FRR does not specify the level of disaggregation in the financial statements note disclosure relating to supplier expenses.

2.111 The ANAO examined the note disclosures in the 2017–18 financial statements of these entities and extracted information relating to departmental contractors and consultants, and total expenses. Figure 2.14 provides a summary of the 2017–18 contractor and consultant expenses against total expenses.

2.112 In 2017–18 entities incurred contractor expenses ranging from $0.2 million (2016–17: $0.3 million) to $455.7 million (2016–17: $440.3 million). Contractor expenses ranged from 0.3 per cent to 16.6 per cent of total expenses (2016–17: 0.3 per cent to 20.1 percent).

Figure 2.14: Entities’ expenses on contractors

 

 

Source: Entities’ financial statements for 2016–17 and 2017–18 and information provided by entities.

Other audit findings

2.113 Other audit findings typically include items relating to the: management and implementation of service level agreements or memoranda of understanding; updating or maintaining key governance documentation; and findings related to presentation and disclosure in the financial statements.

Figure 2.15: Other audit findings 2015–16 to 2017–18

 

 

2.114 One new moderate audit finding was reported in 2017–18 relating to weaknesses in appropriate exercise of delegations at the National Disability Insurance Agency. The moderate audit finding reported in 2016–17 for the Department of Home Affairs was downgraded to a minor audit finding.³⁸

2.115 The weaknesses in this category related to:

• segregation of duties;
• formalisation of key corporate documents including agreements with third parties and internal policies; and
• fraud risk assessments and reporting of fraud to those charges with governance.

Introduction

3.1 The Australian Government’s financial reporting framework is based, in large part, on standards made independently by the Australian Accounting Standards Board (AASB). The framework is designed to support decision-making by, and accountability to, the Parliament.

3.2 The AASB bases its accounting standards on the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. As IFRS are designed primarily for use by private sector and for-profit organisations, the AASB amends the IFRS to reflect significant transactions and events that are particularly prevalent in the public and not-for-profit private sectors. In doing so, it takes into account standards issued by the International Public Sector Accounting Standards Board.

3.3 The Finance Minister prescribes additional reporting requirements for Commonwealth entities. These are contained in the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the Rule). The Rule is made under the Public Governance, Performance and Accountability Act 2013 (the PGPA Act).

3.4 The audits of the financial statements of Australian Government entities are conducted in accordance with the ANAO Auditing Standards, which are made by the Auditor-General under section 24 of the Auditor-General Act 1997. The ANAO Auditing Standards incorporate, by reference, the auditing standards made by the Australian Auditing and Assurance Standards Board (AUASB). The Australian Auditing and Assurance Standards Board bases its standards on those made by the International Auditing and Assurance Standards Board, an independent standard setting board of the International Federation of Accountants.

3.5 The financial reporting and auditing frameworks that applied in 2017–18 are illustrated in Appendices 3 and 4 of this report.

Changes to the Australian public sector reporting framework

Future changes in the financial framework

3.6 In September 2018, the Independent Review into the operation of the Public Governance, Performance and Accountability Act 2013 and Rule in its report to the Minister for Finance and the Public Service made the following recommendations that if adopted have the potential to significantly impact on the status, presentation and preparation of financial statements:

• annual reports (including financial statements) to be presented to the Parliament on or before 30 September. This would increase entity accountability by ensuring that Parliament has this information prior to the Senate supplementary budget estimates hearings;
• reducing the reporting burden on small entities in particular by removing duplication and using standard templates across portfolio budget statements, corporate plans and annual reports;
• increased disclosures relating to remuneration of executives and highly paid staff. In addition to the current key management personnel disclosures, annual reports would include individual disclosures for executive and highly paid staff remuneration similar to that required for Australian Securities Exchange listed companies. Entities would also be required to disclose remuneration policies and practices; and
• annual performance statements to be considered the primary vehicle for reporting entity performance to Parliament.

Future changes to accounting standards

3.7 Public sector entities will need to prepare for a number of new standards for 2018–19 and 2019–20. These new standards represent major revisions to existing standards for financial instruments, revenue and leases. The effort and time required to transition to these new standards should not be underestimated with preparers required to develop business models, write new accounting policies, revise existing accounting policies, undertake a review of all the underlying contracts and in some instances consider amending contracts.

Financial instruments

3.8 The new financial instruments standard AASB 9 Financial Instruments (AASB 9) is effective for financial years commencing on or after 1 January 2018; this means it will have implications for entities in the 2018–19 financial year. AASB 9 moves away from recognition and disclosure primarily determined by the type of instrument to recognition and disclosure determined in large part by an entity’s purpose for acquiring and holding the instrument. Where the financial instrument is held for the purpose of government policy, the entity will need to document the relationship between classification and policy.

3.9 AASB 9 amends the existing historical loss model for the assessment of credit risk to an expected loss model. This will require entities to consider the initial and ongoing ability of the creditor to settle the obligation.

3.10 The Department of Finance has issued a position paper Implementation Options for AASB 9 Financial Instruments, which outlines the Commonwealth’s position with regard to selected options and application guidance for transitioning to the new standard. This includes the position that in applying the new standard retrospectively, as required by AASB 9, entities are not required to restate comparative information and any difference between the previous and revised carrying amount is recognised in opening retained earnings.

Revenue

3.11 The new revenue standard AASB 15 Revenue from Contracts with Customers (AASB 15) is effective for financial years commencing on or after 1 January 2019 for not-for-profit entities, meaning it will impact most Commonwealth entities in the 2019–20 financial year.³⁹ AASB 15 applies to all exchange transactions and provides a consistent approach to revenue recognition. The principle underpinning AASB 15 is that revenue is earned when the customer receives the goods or services that have been promised under the contract. AASB 15 will impact entities where:

• funding is given to provide goods or services to a third party - the entity will recognise revenue when the goods or services are provided to the third party. Under standards currently in force, revenue is recognised when the money is received from the funding provider;
• funding agreements do not identify specific goods or services to be delivered over the term of the contract. Entities will recognise revenue up front unless contract completion is a deliverable; and
• both revenue and the related expense are deferred until the goods or services are delivered, entities with significant non-appropriation revenue are likely to see an impact on their balance sheet and operating result, particularly for long term projects with a significant delay between establishment and initial delivery.

3.12 The Department of Finance has issued a positon paper Implementation Options for AASB 1058 Income of Not-for-Profit Entities in conjunction with AASB 15 Revenue from Contracts with Customers, which outlines the Commonwealth’s position on options for the implementation of AASB 1058 Income of Not-for-Profit Entities (AASB 1058), in conjunction with AASB 15. This includes the position that entities are required to adopt a modified retrospective application on transition. As a consequence, AASB 15 is to be applied to all new and uncompleted contracts from the date of initial application and comparative information for the preceding periods is not required to be restated.

Leases

3.13 The revised leasing standard AASB 16 Leases (AASB 16) is effective for financial years commencing on or after 1 January 2019; this means it will impact entities in the 2019–20 financial year. AASB 16 significantly increases the recognition and disclosure of leases by lessees with the majority of leases currently treated as operating leases recognised on the balance sheet. The net impact on the balance sheet is expected to be limited as the right-of-use asset and liability for future lease payments will be largely offsetting as the value of the right-of-use asset is based on the net present value of the future lease payments. In terms of profit or loss impact, rather than the current annual rent expense over the term of the lease two expenses will be recognised - interest on the lease liability and amortisation of the right-of-use asset. The effect of AASB 16 is to “front-load” the recognition of expense, rather than recognising it on a straight-line basis.

3.14 The adoption of AASB 16 is expected to be a time consuming task for those entities with significant numbers of operating leases. Entities will need to review all lease agreements to identify the right-of-use asset, unbundle any service arrangements and identify where the lease payments are significantly below market value. Lessees will also need to consider that AASB 16 requires entities to include known contingent rents on initial measurement of the asset and liability and subsequently remeasure the lease asset and liability as subsequent contingent rent events become known.

3.15 The Department of Finance has issued a positon paper Implementation Options for AASB 16 Leases which outlines the Commonwealth’s position on the options available for the implementation of AASB 16. This includes mandating the election to not reassess previous lease contracts under the new standard and the modified transition model under which the cumulative effect of application of the new standard is recognised in opening retained earnings.

Note a: Three subsidiary entities classified by the Department of Finance as material are not separately detailed in this chapter as the entities results are reflected in the commentary relating to the parent entity. These entities are: ANSTO Nuclear Medicine Pty Ltd (consolidated into Australian Nuclear Science and Technology Organisation; CSIRO General Partner Co Pty Ltd (consolidated into Commonwealth Scientific and Industrial Research Organisation); and Voyages Indigenous Tourism Australia (consolidated into Indigenous Land Corporation).

Note b: The Commonwealth acquired 100 per cent ownership of Snowy Hydro Limited (SHL) on 29 June 2018. In accordance with the Public Governance Performance and Accountability Act 2013 (PGPA Act) the Public Governance, Performance and Accountability Rule 2014 was amended to prescribe Snowy Hydro Limited as a government business enterprise and amend the first reporting period as the period commencing on 29 June 2018 and ending on 30 June 2019. As a result no audit report was issued by the ANAO in 2018.

Note c: The Regional Investment Corporation (RIC) was established in 2017–18 with a view to fully commencing operations from 1 July 2018. RIC is classified as a material entity for inclusion in the consolidated financial statements. For the purposes of this report RIC has not been included in the Agriculture and Water Resources portfolio chapter due its limited financial transactions in the 2017–18 financial year. An audit report was issued for RIC in 2017–18.

Results of financial statements audits

4.0.1 A central element of the ANAO’s financial statements audit methodology, and the focus of the planning phase of the ANAO audits, is a sound understanding of an entity’s environment and internal controls relevant to assessing the risk of material misstatement in the financial statements. This understanding informs the ANAO’s audit approach, including the reliance that may be placed on entity systems to produce financial statements that are free from material misstatement. The interim phase of the audit assesses the operating effectiveness of controls. In the final audit phase the ANAO completes its assessment of the effectiveness of controls for the full year, substantively tests material balances and disclosures in the financial statements, and finalises the audit opinion on the entity’s financial statements.

4.0.2 In accordance with generally accepted auditing practice, the ANAO accepts a low level of risk that the audit procedures will fail to detect that the financial statements are materially misstated. This low level of risk is accepted because it is too costly to perform an audit that is predicated on no level of risk. Specific audit procedures are performed to ensure that the risk accepted is low. These procedures include: obtaining knowledge of the entity and its environment, reviewing the operation of internal controls, undertaking analytical reviews, testing a sample of transactions and account balances, and confirming significant year end balances with third parties.

4.0.3 Where a performance audit was tabled during 2017–18 that was relevant to the financial management or administration of an entity, the impact of those observations on the audit approach will be discussed within the relevant portfolio section. The observations of performance audits tabled since 1 July 2018 and relevant to the financial management or administration of entities will inform the ANAO’s 2018–19 financial statements audits risk identification process.

4.0.4 Figure 4.0.1 provides each portfolio’s contribution, as a percentage of the Australian Government’s 2017–18 Consolidated Financial Statements.

Figure 4.0.1: Portfolio’s contribution as a percentage of the Australian Government’s 2017–18⁴⁰ Consolidated Financial Statements

 

 

Source: ANAO analysis of CFS and portfolio’s financial statements for the year ended 30 June 2018.

4.0.5 This chapter reflects portfolio arrangements at 30 June 2018 as established by the September 2017 Administrative Arrangements Order⁴¹ and outlines the following information:

• the portfolio overview;
• for each material entity within the portfolio:
  • the primary role of the entity;
  • a summary of financial performance that provides a comparison of the 2016–17 and 2017–18 key financial statement items and commentary regarding significant movements;
  • key areas of financial statements risk; and
• the status of significant and moderate audit findings during 2017–18 and previous years for all entities.

4.0.6 Table 4.0.1 presents a summary of significant and moderate findings reported at 30 June 2018 and 30 June 2017 by portfolio and entity, including the number carried forward as unresolved from the previous year. The findings and associated recommendations were agreed by all entities with one exception relating to the moderate audit finding reported to the Director of National Parks which was partially agreed.⁴² Table 4.0.1 does not include significant legislative breaches. One significant legislative breach was reported in relation to the Northern Land Council (paragraphs 4.16.35 to 4.16.39).

Table 4.0.1: Significant and moderate audit findings by portfolio and entity

Note a: Minor findings identified previously and reclassified to a moderate or significant finding are considered new for the purposes of this table.

Note b: Repeat/unresolved findings are categorised as such if unresolved from a prior financial year. Findings transferred to another entity as a result of machinery of government changes which remain unresolved are treated as repeat findings for the purposes of this table.

Source: 2017–18 and 2016–17 ANAO correspondence.

4.1 Agriculture and Water Resources portfolio

Portfolio overview

4.1.1 The Agriculture and Water Resources portfolio supports the sustainability, productivity, international competitiveness and profitability of Australia’s agricultural, fisheries and forestry industries and the sustainable, efficient and productive management and use of rivers and water resources.

4.1.2 As a result of the 19 December 2017 machinery of government changes, responsibility for administering the National Water Infrastructure Development Fund was transferred to the Department of Infrastructure, Regional Development and Cities.

4.1.3 The Regional Investment Corporation (RIC) was established as a corporate Commonwealth entity on 8 March 2018 under the Regional Investment Corporation Act 2018. The Corporation did not commence operations until 1 July 2018. The Department of Agriculture and Water Resources was allocated the budget for undertaking establishment of the Corporation in 2017–18. In June 2018, the funds were transferred to the Corporation to continue the establishment activities.⁴³

4.1.4 Figure 4.1.1 shows the Agriculture and Water Resources’ portfolio’s income, expenses, assets and liabilities.

Figure 4.1.1: Agriculture and Water Resources portfolio income, expenses, assets and liabilities⁴⁴

 

 

Source: CFS 2017–2018.

4.1.5 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Agriculture and Water Resources (Agriculture), and one other material entity in the portfolio, Grains Research and Development Corporation.

Department of Agriculture and Water Resources

4.1.6 The Department of Agriculture and Water Resources (Agriculture) works with national and international governments and industry partners to increase the value of agricultural trade and reduce the risk to the agriculture sector. Agriculture contributes to maintaining and improving market access for primary producers, encouraging agricultural productivity in primary industries and supporting sustainable, high-quality natural resources to benefit producers and the community.

Summary of financial performance

4.1.7 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Agriculture, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.1: Key departmental financial statements items

Source: Agriculture’s financial statements for the year ended 30 June 2018.

4.1.8 The net cost of services has increased primarily because of the higher grant expenses related to the establishment of RIC which resulted in the department’s transfer to the RIC of establishment funding.

4.1.9 Total assets have increased primarily due to the increased number of projects that have been in progress by the department throughout the year. This also resulted in an increase to total equity.

Table 4.1.2: Key administrated financial statements items

Source: Agriculture’s financial statements for the year ended 30 June 2018.

4.1.10 The increase in total expenses is due to higher than anticipated transactions related to the wool and grain commodities during the year resulting in higher levy disbursements. Total assets administered on behalf of Government increased primarily due to the change in the reporting framework for cash and cash equivalents. Special account figures are reported as part of the cash and cash equivalents figure for the 2017–18 financial year.

Key areas of financial statements risk

4.1.11 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Agriculture’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.1.3, including which areas were considered key audit matters (KAM) by the ANAO. There were no significant or moderate audit findings identified relating to these key areas of risk.

Table 4.1.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and Agriculture’s financial statements for the year ended 30 June 2018.

Audit results

4.1.12 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Grains Research and Development Corporation

4.1.13 The Grains Research and Development Corporation (GRDC) is a not-for-profit entity established to enhance the productivity, competitiveness and environmental sustainability of Australian grain growers and benefit the industry and wider community, through planning, managing and implementing investments in grains research and development.

Summary of financial performance

4.1.14 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the GRDC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.4: Key financial statements items

Source: GRDC’s financial statements for the year ended 30 June 2018.

4.1.15 The increase in net cost of services was mainly due to the decrease in industry contributions due to lower production levels across the grains industry, lower royalties due to royalties received from one major investing company in 2016–17 that were not recurring in 2017–18 and lower research and development expenses due to the variations in the number and size of individual projects.

4.1.16 The decrease in assets was due to the lower Commonwealth Contribution held as a receivable in 2017–18 compared to the prior year. The decrease in liabilities was due to a decrease in research and development liabilities as a result of more active management of projects resulting in timely processing of suppliers claims for research and development.

Key areas of financial statements risk

4.1.17 The ANAO has completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of GRDC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.1.5. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.1.5: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the GRDC’s financial statements for the year ended 30 June 2018.

Audit results

4.1.18 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

4.2 Attorney-General’s portfolio

Portfolio overview

4.2.1 The Attorney-General’s portfolio covers a range of functions and policy areas, including privacy; family law and marriage; protecting and promoting human rights; international law; freedom of information; personal property securities; government records management; and native title. It also includes legal services, whole-of-government integrity, protective security and courts and tribunals.

4.2.2 The Attorney-General’s Department (AGD) is the lead entity in the portfolio and delivers programs and policies to maintain and improve Australia’s law and justice framework. Through the Australian Government Solicitor, AGD also provides legal services to the Commonwealth. As a result of machinery of government (MOG) changes announced by the Prime Minister in December 2017, elements of national security, law enforcement policy and emergency management functions moved to the Department of Home Affairs.

4.2.3 Figure 4.2.1 shows the Attorney-General’s portfolio’s income, expenses, assets and liabilities.

Figure 4.2.1: Attorney-General’s portfolio income, expenses, assets and liabilities⁴⁵

 

 

Source:  2017–18 CFS.

4.2.4 The following sections provide a summary of the 2017–18 financial statements audit results for the Attorney-General’s Department, and other material entities.

Attorney-General’s Department

4.2.5 AGD is responsible for the provision of expert advice and services on a range of law and justice issues. Responsibilities relating to national security and emergency management were transferred to the Department of Home Affairs in December 2017 as a result of the MOG.

Summary of financial performance

4.2.6 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the AGD’s, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.1: Key departmental financial statements items

Source: AGD’s financial statements for the year ended 30 June 2018.

4.2.7 The decrease in the net cost of services was mainly due to a reduction in staff associated with the MOG changes during the year resulting in a decrease in employee benefit expenses of $11.6 million. In addition, AGD transferred surplus lease space in Barton and associated fit-out to other Commonwealth entities in 2016–17 resulting in the recognition of a write off expense for assets valued at $10.8 million, no write downs occurred during 2017–18.

4.2.8 All other major movements in the above items were the result of the MOG changes during the year.

Table 4.2.2: Key administered financial statements items

Source: AGD’s financial statements for the year ended 30 June 2018.

4.2.9 The reduction in expenses was mainly due to completion of both the Royal Commission into the Protection and Detention of Children in the Northern Territory in October 2017 and the Royal Commission into the Institutional Responses to Child Sexual Abuse in March 2018. The total liabilities decreased as a result of the completion of the Royal Commissions and the transfer of the national security function under the MOG changes.

4.2.10 The decrease in total assets was largely due to the transfer of natural disaster relief programs and functions under the MOG changes. This was partially offset by increases in the department’s administered investments.

Key areas of financial statements risk

4.2.11 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of AGD’s financial statements. The ANAO focuses audit effort on those areas that were assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.2.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the AGD’s financial statements for the year ended 30 June 2018.

Audit results

4.2.12 There were no significant or moderate unresolved audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Federal Court of Australia

4.2.13 The Federal Court of Australia (Federal Court) is a superior court of record and a court of law and equity. The Federal Court of Australia’s jurisdiction covers almost all civil matters arising under Australian federal law and some summary and indictable criminal matters. The Federal Court hears appeals from decisions of single judges of the court, decisions of the Federal Circuit Court in non-family matters, decisions of the Supreme Court of Norfolk Island and certain decisions of state and territory supreme courts exercising federal jurisdiction.

4.2.14 The corporate services of the Family Court and Federal Circuit Court were amalgamated with the Federal Court of Australia, bringing the three Courts into a single administrative body with a single appropriation. The Courts Administration Legislation Amendment Act 2016 established the amalgamated body, known as the Federal Court of Australia, from 1 July 2016.

4.2.15 The Family Court, through its specialist judges and staff, helps Australians to resolve their complex family disputes. The Federal Circuit Court also provides an alternative to litigation in the Family Court and the Federal Court of Australia.

Summary of financial performance

4.2.16 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the Federal Court, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.4: Key departmental financial statements items

Source: Federal Court’s financial statements for the year ended 30 June 2018.

4.2.17 The increase in the net cost of services primarily relates to a $5.9 million increase in judicial expenses related to increases in remuneration and new judicial appointments. In addition depreciation and amortisation increased by $2.5 million as a result of the full year effect of assets transferred in 2016–17.

Table 4.2.5: Key administered financial statement items

Source: Federal Court of Australia’s financial statements for the year ended 30 June 2018.

4.2.18 The significant increase in total income of $26.7 million predominantly relates to the collection of fines in relation to a significant matter.

Key areas of financial statements risk

4.2.19 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Federal Court of Australia’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.2.3. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.6: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the Federal Court of Australia’s financial statements for the year ended 30 June 2018.

Audit results

4.2.20 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

High Court of Australia

4.2.21 The High Court of Australia (the High Court) is the highest court in Australia’s judicial system. The High Court is responsible for interpreting and applying the law of Australia; deciding on cases of special federal significance, including challenges to the constitutional validity of laws; and hearing appeals, by special leave, from Federal, state and territory courts.

Summary of financial performance

4.2.22 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the High Court and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.7: Key departmental financial statements items

Source: High Court’s financial statements for the year ended 30 June 2018.

4.2.23 The increase in the net cost of services was due to a higher depreciation expense and a reduction in other gains. The higher depreciation expense is the result of an increase in the value of the High Court building following a revaluation as at 30 June 2017 and capital expenditure, including the completion of stage one of the replacement of the Heating, Ventilation and Air Conditioning (HVAC) system and refurbishment of the Brisbane premises. Other gains was higher in 2016–17 due to the one-off transfer of assets from the Sydney Law Court building that occurred on 1 July 2016.

4.2.24 The increase in total assets relates to building works completed in 2017–18 and an increase in the valuation of the High Court building.

4.2.25 Fluctuations in other balances reflect normal business activities.

Table 4.2.8: Key administered financial statements items

Source: High Court’s financial statements for the year ended 30 June 2018.

4.2.26 The High Court’s administered income relates to the Court’s hearing and filing fees. The hearing fees collected remained relatively stable between 2016–17 and 2017–18, reflecting normal business activities.

Key areas of financial statements risk

4.2.27 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of High Court’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 is provided in Table 4.2.9. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.9: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the High Court’s financial statements for the year ended 30 June 2018.

Audit results

4.2.28 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

National Archives of Australia

4.2.29 The National Archives of Australia (the National Archives) has four main roles under the Archives Act 1983: promote sound records management by Australian Government entities by providing and setting standards for the management of information and records; authorise the retention and disposal of records; preserve records of national archival value; and make material publicly available.

Summary of financial performance

4.2.30 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the National Archives, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.10: Key financial statements items

Source: The National Archives’ financial statements for the year ended 30 June 2018.

4.2.31 The reduction in revenue from Government was due to additional funding provided in 2016–17 for the relocation of staff and records to the new National Archives Preservation Facility which was largely completed in June 2017.

4.2.32 The increase in the deficit mostly relates to a reduction in transfer of collection items from the Australian Government to the National Archives.

4.2.33 Other comprehensive income reflects changes in the value of the National Archives collection. In 2017–18 the National Archives had the collection valued by an experienced and qualified valuer. The valuation resulted in a large increase in the collection’s value reflected in other comprehensive income for 2017–18 compared to the previous year.

Key areas of financial statements risk

4.2.34 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of the National Archives’ financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 is provided in Table 4.2.11. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.2.11: Key areas of financial statements risk audit results

Source: ANAO 2017–18 audit results, and the National Archives’ financial statements for the year ended 30 June 2018

Audit results

4.2.35 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

4.3 Communications and the Arts portfolio

Portfolio overview

4.3.1 The Department of Communications and the Arts is the lead entity in the portfolio, with responsibilities including the promotion of an innovative and competitive communication sector, through policy development, advice and program delivery, to achieve the full potential of digital technologies and communications services. The department’s role also includes support for participation in, and access to, Australia’s arts and culture through developing and supporting cultural expression.

4.3.2 In addition to the department, 17 entities within the portfolio deliver programs, including postal services, public broadcasting, national broadband infrastructure, and cultural activities.

4.3.3 Figure 4.3.1 shows the Communications and Arts’ portfolio’s income, expenses, assets and liabilities.

Figure 4.3.1: Communications and the Arts portfolio’s income, expenses, assets and liabilities⁴⁶

 

 

Source: 2017–18 CFS.

4.3.4 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Communications and the Arts, and other material entities in the portfolio.

Department of Communications and the Arts

4.3.5 The core areas of responsibility of the Department of Communications and the Arts (Communications) are promotion of an innovative and competitive communication sector through policy development, advice and program delivery in order to achieve the full potential of digital technologies and communications services. The department’s role also includes support for participation in, and access to, Australia’s art and culture through developing and supporting cultural expression.

Summary of financial performance

4.3.6 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the department, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.1: Key departmental financial statements items

Source: Department of Communications and the Arts’ financial statements for the year ended 30 June 2018.

4.3.7 Communication’s main office relocated to new premises as part of the Commonwealth’s Operation Tetris. The take up of new premises resulted in a surplus due to a one off net gain of $11.3 million on office fit-out being recognised.

Table 4.3.2: Key administrated financial statements items

Source: Department of Communications and the Arts’ financial statements for the year ended 30 June 2018.

4.3.8 The increase in income coincides with the Commonwealth’s transition to funding completion of the national broadband network rollout through debt rather than capital from November 2017 onwards. This led to $69.7 million in interest being recognised in 2017–18. The outstanding loan balance at 30 June due is net of interest.

4.3.9 Following valuation assessments in 2017–18, the value of the Government’s investment in NBN Co Limited (NBN) decreased by $2.8 billion. This reduction is offset by the $5.5 billion loan repayments due to the department from NBN.

Key areas of financial statements risk

4.3.10 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of the department’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.3, including which areas were considered key audit matters (KAM) by the ANAO.

Audit results

4.3.11 The following table summarises the status of audit findings reported by the ANAO in 2016–17 and 2017–18.

Table 4.3.4: Status of audit findings

Note a: The moderate audit finding – Risk management practices relating to loan facility to NBN was first reported to Parliament in Auditor-General Report No.47 of 2017–18 Interim Report on Key Financial Controls of Major Entities.

Source: Audit results 2017–18

4.3.12 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that the department’s 2017–18 financial statements were not materially misstated.

Unresolved moderate audit finding

Risk management practices relating to NBN’s loan facility

4.3.13 On 22 December 2016, the Commonwealth entered into a loan arrangement with NBN which is administered by the department. The loan agreement sets out the terms of the $19.5 billion facility that is available to NBN for the period 1 July 2017 to 30 June 2021, including the applicable undertakings, restrictions and interest rate and a requirement that the principal amount borrowed is to be repaid in full by 30 June 2021. The value of the loan drawn down as at 30 June 2018 was $5.5 billion. For the majority of the loan period NBN’s forecast operating cash flows are negative with a small positive cash flow projected for 2021.

4.3.14 Communications had not established the practices necessary to manage the risks associated with the loan facility. Communications was not able to provide evidence of:

• their undertaking of the evaluation and assessment in establishing the loan, including suitability of the terms and conditions within the contract, other than the interest rate, and details of assessment undertaken to determine NBN’s capacity to fully service the loan;
• a governance policy or a suitable framework for Communications’ oversight, review and monitoring of NBN’s compliance with the lending arrangements;
• ongoing monitoring of NBN’s compliance with several aspects of the loan agreement; and
• an analysis to progressively assess NBN’s capacity to fully repay the loan.

4.3.15 The failure to fully establish practices to manage the risks associated with this loan significantly increases the Commonwealth’s risk of exposure to loss. The Commonwealth is the sole shareholder of NBN, therefore the recovery of any losses may need to be absorbed by the Commonwealth.

4.3.16 Communications are in the process of reviewing the governance and risk management arrangements to better support the ongoing management of the loan facility. They have draft governance arrangements which are being considered by management prior to implementation.

4.3.17 Prior to the signing of the department’s financial statements the Government announced a decision in relation to the loan to NBN. The information was included in the department’s financial statements as follows:

The Commonwealth has agreed to extend the tenor of its loan to NBN Co Limited by three years (from 30 June 2021 to 30 June 2024) and allow NBN Co Limited to access up to $2 billion of private sector debt. The terms of the amended and restated Commonwealth loan and terms for the private debt are subject to the approval of the Commonwealth.

Australian Broadcasting Corporation

4.3.18 The Australian Broadcasting Corporation (ABC) is responsible for informing, educating, facilitating public debate and fostering the performing arts by providing innovative and comprehensive broadcasting services of a high standard to the nation.

Summary of financial performance

4.3.19 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the ABC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.5: Key financial statements items

Source: ABC’s financial statements for the year ended 30 June 2018.

4.3.20 The increase in net cost of services is partially attributed to the initial recognition of a building maintenance provision of $30.7 million. The increase in net cost of services is also partially attributed to the execution and implementation of the Investing in Audiences strategy which included expenditure on Australian content and other content initiatives.

4.3.21 The decrease in other comprehensive income is a result of a revaluation of the properties portfolio in 2016–17 which resulted in the recognition of an increment of $65.7 million in the prior year.

4.3.22 All other movements are not significant and are a result of normal business activities.

Key areas of financial statements risk

4.3.23 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the ABC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.6. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.6: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and ABC’s financial statements for the year ended 30 June 2018.

Audit results

4.3.24 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Communications and Media Authority

4.3.25 The core areas of responsibility of the Australian Communications and Media Authority (ACMA) are regulation of broadcasting, radio communications (spectrum management), telecommunications and online content.

Summary of financial performance

4.3.26 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the ACMA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.7: Key departmental financial statements items

Source: The ACMA’s financial statements for the year ended 30 June 2018.

4.3.27 The increase in the net cost of services was mainly attributable to an increase in contractor expenses. Total assets mainly decreased due to an additional year of amortisation for intangible assets during 2017–18. The fluctuations in other balances reflect normal business activities.

Table 4.3.8: Key administrated financial statements items

Source: The ACMA’s financial statements for the year ended 30 June 2018.

4.3.28 The increase in total expenses was the result of an increase in expenses for consultants, contactors as well as asset write-downs and impairment losses of assets.

4.3.29 The increase in total income and assets mainly relates to the revenue recognised in 2017–18 from the sale of spectrum radio communication multi-year licences.

4.3.30 The decrease in liabilities is due to revenue received in advance, prior to 30 June 2017, for spectrum licences which have now been recognised as revenue earned during the 2017–18 financial year.

Key areas of financial statements risk

4.3.31 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the ACMA’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 is provided in Table 4.3.9. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.3.9: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and the ACMA’s financial statements for the year ended 30 June 2018.

Audit results

4.3.32 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Postal Corporation

4.3.33 The Australian Postal Corporation (Australia Post) is a government business enterprise that operates post offices and distributes mail and parcels in Australia and internationally.

Summary of financial performance

4.3.34 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by Australia Post, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.10: Key financial statements items

Source: Australia Post and its controlled entities’ financial statements for the year ended 30 June 2018.

4.3.35 Australia Post reported a net profit during 2017–18, continuing the positive net profit trend since 2015–16. Australia Post reported a marginal decrease in total profit during 2017–18. Total revenue and income and total expenses is consistent with the results of 2016–17. The increase to total revenue and income is primarily due to growth in revenue ($245 million) associated with the domestic parcel services and international products. This continues to be offset by the decline in letter revenue ($114.2 million) mostly driven by year-on-year mail volume declines.

4.3.36 Total expenses increased primarily due to the increase in supplies expenses and employee expenses. The increase in suppliers’ expenses is in line with the increase in the volume of domestic parcel services and international products. The increase in employee expense is primarily due to increases in the annual salary rate.

4.3.37 Income tax expenses has decrease primarily as a result of non-assessable capital gains associated with the sale of the Sydney GPO.

4.3.38 Australia Post’s assets increased marginally. The increases are attributed to an overall increase in total current assets of $258.6 million and a reduction of total non-current assets of $204.4 million. The increases to the current assets are primarily a result of movements in cash held of $149.5 million and increases to the balance of assets held for sale at 30 June 2018 of $73.2 million, which is a result of reclassification of investments which were classified as part of the equity accounted investee account balance in 2016–17. The sale of assets during the year contributed to the increased cash balance.

4.3.39 The overall decrease in the non-current asset base is predominantly due to a culmination of the transfer noted above between equity accounted investee account ($236.5 million) and the assets held for sale and the assessments of intangible assets held which decreased due to the effect of amortisation of computer software and impairment of brand names and trademarks, offset by additions ($117.5 million). These movements were offset by an increase in the value of the net superannuation asset of $218.3 million and increases to the property plant and equipment asset base of $39.5 million.

Key areas of financial statements risk

4.3.40 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Australia Post’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.11, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.11: Key areas of financial statements risk

Source: ANAO 2017–18 audit results and the Australia Post’s financial statements for the year ended 30 June 2018.

Audit results

4.3.41 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

National Gallery of Australia

4.3.42 The core areas of responsibility of the National Gallery of Australia (the Gallery) are: developing and maintaining a national collection of works of art to exhibit or to make available for others to exhibit; and making the most advantageous use of the national collection in the national interest.

Summary of financial performance

4.3.43 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the Gallery, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.12: Key departmental financial statement items

Source: The Gallery’s financial statements for the year ended 30 June 2018.

4.3.44 The decrease in net cost of services and deficit attributable to the Government is the result of an increase in own-source revenues relating to additional gifts of works of art and grant funding received from the portfolio department in 2017–18. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.3.45 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the Gallery’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.13. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.13: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and the Gallery’s financial statements for the year ended 30 June 2018.

4.3.46 Auditor-General Report No.46 2017–18 Management of the National Collections was tabled during 2017–18 and was relevant to the financial management or administration of the Gallery. This report included observations relevant to the key areas of financial statements risk outlined in Table 4.3.13, in particular, valuation of items in the heritage and cultural collection.

4.3.47 The report concluded that the National Gallery of Australia’s collection management practices were not fully effective due to deficiencies in financial and asset management controls. In light of the results of the performance audit, the financial statements audit approach was designed to obtain appropriate and sufficient assurance that the valuation of the collection was materially correct and in accordance with Australian accounting standards.

Audit results

4.3.48 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

National Library of Australia

4.3.49 The core responsibilities of the National Library of Australia (the Library) are developing and maintaining a national collection of library material, including a comprehensive collection of material relating to Australia and the Australian people, and to make this material available to the public.

Summary of financial performance

4.3.50 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the Library, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.14: Key financial statements items

Source: The Library’s financial statements for the year ended 30 June 2018.

4.3.51 The movement between years in net cost of services is mainly due to the increase in employee and supplier expenses and the reduction of revenue for cultural gifts received during the year. The reduction of other comprehensive income is mainly due to the relatively lower increases in the fair value of land and building due to stable market conditions.

Key areas of financial statements risk

4.3.52 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the Library’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 is provided in Table 4.3.15. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.3.15: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the Library’s financial statements for the year ended 30 June 2018.

Audit results

4.3.53 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

NBN Co Limited

4.3.54 The provision of wholesale services to internet service providers is NBN Co Limited’s (NBN) core area of responsibility. The NBN is a government business enterprise incorporated under the Corporations Act 2001.

Summary of financial performance

4.3.55 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by NBN, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.16: Key financial statements items

Source: NBN’s financial statements for the year ended 30 June 2018.

4.3.56 In 2017–18, NBN generated revenue and income of $2.0 billion and reported a net loss of $4.8 billion, after taxation. Revenue increased as the network continues to roll out with 1.6 million premises activated during the year. A corresponding increase was observed in payments to Telstra and Optus for customer disconnection and migration activity.

4.3.57 As at 30 June 2018, NBN reported total assets of $28.2 billion, an increase of $4.1 billion compared with 2016–17, primarily due to an increase of $4.8 billion in property, plant and equipment and intangibles as a result of capital expenditure. The key drivers of capital expenditure during the year related to design, construction and activation activities for the deployment of NBN’s access technologies across Australia. The increase is offset by a reduction in current assets of $727.0 million which is primarily attributable to a reduction in cash and cash equivalents.

4.3.58 As at 30 June 2018, NBN reported total liabilities of $16.0 billion, an increase of $6.8 billion compared with 2016–17, primarily due to the loan draw down of $5.5 billion from the $19.5 billion loan facility with the Commonwealth Government. The remaining $1.3 billion is primarily attributable to additional finance leases with telecommunication providers entered into during the year.

4.3.59 During the year, NBN received Government equity injections of $2.0 billion, which were primarily used in acquiring property, plant and equipment (including network assets), intangible assets and supporting operational requirements. As at 30 June 2018, the contributed equity of $29.5 billion has been offset by accumulated losses of $17.3 billion.

Key areas of financial statements risk

4.3.60 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of NBN’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.17, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.17: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the NBN’s financial statements for the year ended 30 June 2018.

Audit results

4.3.61 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Special Broadcasting Service Corporation

4.3.62 Special Broadcasting Service Corporation (SBS) is responsible for contributing to a more cohesive, equitable and harmonious Australia through its television, radio and digital media services.

Summary of financial performance

4.3.63 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by SBS, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.18: Key financial statements items

Source: SBS’ financial statements for the year ended 30 June 2018.

4.3.64 The movements in SBS’ key financial statements items are not significant and are a result of normal business activities.

Key areas of financial statements risk

4.3.65 The ANAO completed appropriate audit procedures on all material items. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.3.19. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.19: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and SBS’ financial statements for the year ended 30 June 2018.

Audit results

4.3.66 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

4.4 Defence portfolio

Portfolio overview

4.4.1 The Defence portfolio includes a range of entities that together are responsible for the defence of Australia and its national interests. The principal entity within the Defence portfolio is the Department of Defence (Defence).

4.4.2 Defence, including the Australian Defence Force, is responsible for protecting and advancing Australia’s strategic interests through the provision of appropriately prepared and equipped armed forces. Accordingly, Defence prepares for and conducts military operations and other tasks as directed by the Australian Government.

4.4.3 Figure 4.4.1 shows the Defence portfolio’s income, expenses, assets and liabilities.

Figure 4.4.1: Defence portfolio’s income, expenses, assets and liabilities⁴⁷

 

 

Source: 2017–18 CFS

4.4.4 The following sections provide a summary of the 2017–18 financial statements audit results for Defence and other material entities and commentary related to the emphasis of matter for Defence Housing Investment Management.

Department of Defence

4.4.5 Defence is a department of state, headed by the Secretary of the Department of Defence with the Australian Defence Force commanded by the Chief of the Defence Force. The Australian Defence Force consists of the three Services - the Royal Australian Navy, the Australian Army and the Royal Australian Air Force. These Services are commanded by Service Chiefs.

4.4.6 Defence is collectively responsible for protecting and advancing Australia’s strategic interests through the provision of regionally superior Australian Defence Force with highest levels of military capability and scientific and technological sophistication. Defence prepares for and conducts military operations and other tasks as directed by the Australian Government.

Summary of financial performance

4.4.7 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Defence, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.1: Key departmental financial statements items

Source: Defence’s financial statements for the year ended 30 June 2018.

4.4.8 The net cost of services increased mainly due to the increase in employee benefits, depreciation and other expenses. The employee benefits were driven by an increase in wages and salaries. The revaluation uplift as a result of the measurement of specialist military equipment at fair value during 2016–17 resulted in increased depreciation expenses in 2017–18. Other expenses increased mainly due to re-estimates of decommissioning, decontamination, restoration and similar provisions.

4.4.9 Revenue from government mainly increased due to additional funding provided for ongoing military operations and depreciation funding.

4.4.10 During 2017–18 Defence continued to apply the fair value method for accounting for specialist military equipment. The revaluation resulted in increases to other comprehensive income as a result of increases to the asset revaluation reserve and the asset values.

Table 4.4.2: Key administered financial statements items

Source: Defence’s financial statements for the year ended 30 June 2018.

4.4.11 The decrease in total expenses is mainly due to a reduction in the service cost related to the defined benefit liabilities administered on behalf of Government. The service cost is sensitive to movements in the interest rate which resulted in a reduction of $1.2 billion.

4.4.12 The movement in other comprehensive income and liabilities administered on behalf of Government is a result of the actuarial revaluation of the Australian Government’s net defined benefit liabilities. The actuarial revaluation of the Australian Government’s net defined benefit liabilities has increased by $18.9 billion. This increase is due largely to the movement in the discount rate and the revision of the key demographic assumptions applied to determine the value of the liabilities.

Key areas of financial statements risk

4.4.13 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Defence’s financial statements. The ANAO focused audit effort on those areas that were assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.4.3, including which areas were considered key audit matters (KAM) by the ANAO.

Audit results

4.4.14 The following table summarises the status of audit findings reported by the ANAO in 2016–17 and 2017–18.

Table 4.4.4: Status of audit findings

4.4.15 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Defence’s 2017–18 financial statements were not materially misstated.

New significant audit finding

Management and monitoring of SME balances in ROMAN and MILIS

4.4.16 Defence uses a number of clearing accounts in its financial management information system (ROMAN) to manage the acquisition and sustainment of SME assets including: Military Support Items, Key Defence Assets and other platform support equipment. The Military Integrated Logistics Information System (MILIS) is the information management system that manages the inventory balances and calculates costs for reporting in ROMAN.

4.4.17 A significant number of MILIS asset receipts are generated through the raising of external purchase orders (EPOs). MILIS EPOs are not directly linked to a payment in ROMAN which requires a manual matching process linking receipt and payment which is subject to error. Matching and substantiation issues arise through the use of MILIS EPOs, as payments have to be entered in ROMAN and transaction details entered in MILIS and subsequently reconciled. Where business units are unable to appropriately match MILIS receipts to capital payments, this results in unmatched transactions resulting in a misstatement of the quantity and value of the inventory balances.

4.4.18 The ANAO identified the following issues with the substantiation of SME transactions in MILIS and the clearing accounts:

• significant delays between when the payment is made in ROMAN for the asset acquisition and the date the asset is receipted in MILIS, which may contribute to price differences;
• delays in transferring SME from the assets under construction (AUC) general leger account to the fixed asset register once available for use;
• transactions not validated in a timely manner and not reconciled to unmatched balances in the clearing accounts;
• some payments were posted to incorrect general ledger accounts which were not identified in the reconciliation and substantiation process and may lead to permanent uncleared differences in the clearing accounts.
• some purchases were posted to incorrect cost centres;
• not reconciling and managing accrual journals;
• misclassification of transactions between and within the various clearing accounts; and
• business units had not validated balances in MILIS and/or confirmed whether the SME were in use.

4.4.19 A residual uncertainty in the SME balances of $442.8 million remained which Defence agreed to investigate and remediate in 2018–19. The management and monitoring of SME balances in Defence’s financial and logistics information systems supports budgetary and capability decisions made by Defence. In Defence’s 2017–18 financial statements the SME balance was $62.0 billion.

4.4.20 A lack of a timely and accurate reconciliation of complex and significant SME asset balances increases the risk that the SME asset balances, depreciation expense, and asset revaluation reserve may be materially misstated.

4.4.21 The ANAO recommended Defence undertake investigation and remediate its SME balances within MILIS and ROMAN accounting business processes and balances by:

• performing monthly reconciliations and substantiate each clearing account, MILIS and ROMAN AUC balances as complete and accurate;
• validating asset pricing and receipting transactions in a timely manner;
• reviewing the asset receipting procedures in MILIS to ensure they align to the payment details from the external system;
• receipting SME transferred from the AUC general ledger account to the fixed asset register when the asset is entered into service; and
• reviewing and remediating MILIS asset balances for any legacy systems related transactions.

4.4.22 Defence agreed with the recommendation and will be implementing additional controls designed to ensure that SME balances are accurate and free from material misstatement.

New moderate audit finding

Documentation supporting the annual assessment of SME impairment indicators

4.4.23 Under AASB 136 Impairment of Assets, impairment is to be considered on an annual basis. SME is dispersed across Defence bases with the acquisition, custodian and sustainment responsibility residing with Systems Program Offices (SPO) and Project Offices (PO) and other service groups. These business units advise the Defence Finance Group annually of any impairment indicators.

4.4.24 The Service Chiefs or appropriate delegate provide an annual written representation on whether impairment indicators exist that may have a material effect on the value of SME platforms or AUC projects. The Service Chief sign-off includes consideration of indicators of physical damage, obsolescence and under performance of capabilities when reviewing the financial impairment of SME at the reporting date.

4.4.25 As reported by the ANAO in 2016–17, documentation provided to the Defence Finance Group by the business units was not always complete and did not reflect current circumstances providing limited value to the overall impairment assurance process.

4.4.26 In 2017–18 the ANAO noted instances where the assessment of impairment indicators had not been completed by Defence. The ANAO testing of the impairment calculations provided by Defence resulted in an increase to the impairment figure reported in the 2017–18 financial statements.

4.4.27 These weaknesses increased the risk of misstatements in the financial statements. This information supports the overall SME balance and associated depreciation expense recorded in the financial statements.

4.4.28 The ANAO recommends that:

• Defence document in each SME impairment assessment its consideration of internal and external sources of information;
• the relevant senior capability manager and service groups’ CFO identify at an operational and strategic level whether there are any additional impairment indicators to be considered; and
• the individual SPO returns supporting the annual written representations should be documented and reviewed by an appropriate delegate.

4.4.29 Defence agreed with the recommendation and will consider additional sources of information when assessing for impairment. Defence will seek appropriate authorisation of impairment to ensure its accuracy.

Resolved moderate audit findings

Monitoring of the activities performed by service providers

4.4.30 Defence engaged an external organisation to manage and maintain Defence’s IT Infrastructure that host business applications. Under a service contract, this organisation is required to maintain a reliable and secure ICT environment; perform authorised changes to IT infrastructure; and support Defence in meeting its performance, monitoring and compliance requirements under the Protective Security Policy Framework and Australian Government Information Security Manual.

4.4.31 This organisation is also responsible for the management and maintenance of hosting infrastructure that supports the enterprise resource planning systems, including the management information domains of the human resources and financial management information systems and the logistics management system.

4.4.32 The ANAO observed weaknesses in relation to:

• the timely removal of privileged access that was no longer required; and
• the management of changes made to Defence’s IT infrastructure that was not in accordance with Defence’s policies and procedures.

4.4.33 During the 2017–18 final audit, the ANAO tested the controls Defence implemented surrounding removal of privileged access no longer required and the managing of changes made to Defence’s IT infrastructure. As a result, this finding was resolved.

Completeness and accuracy of Specialist Military Equipment data to support the fixed asset register

4.4.34 Specialist military equipment (SME) is dispersed across Defence bases with the acquisition, custodian and sustainment responsibility residing with SPO, PO and service groups. These business units annually advise the centralised asset accounting team of impairment indicators, asset componentisation, inspection costs, present decommissioning costs and changes to asset useful lives, by completing a questionnaire and updating the Key Defence Asset Register (KDAR). During the 2016–17 final audit the ANAO observed weakness in the impairment assessment process for SME platforms and AUC projects that increased the risk of misstatement of the SME and depreciation balances. These weaknesses included:

• information provided by the business units did not always reflect the current circumstances of the SME project;
• incomplete information was provided by the business units in relation to the impairment assurance process; and
• a lack of detailed and approved information contained in the KDAR to identify asset critical information.

4.4.35 During the 2017–18 final audit the ANAO tested the information supporting the KDAR and the fixed asset register including a detailed assessment of the quality assurance processes implemented and noted that the 30 June 2018 KDAR was supported by senior capability manager review and sign off. As a result the finding has been resolved, however, the lack of valid information supporting the SME FAR has been incorporated into the 2017–18 new moderate finding as reported at paragraph 4.4.23.

Australian War Memorial

4.4.36 The Australian War Memorial (AWM) is responsible for maintaining and developing the national memorial to Australians who have lost their lives in wars or warlike operations; developing, maintaining and exhibiting a national collection of historical material; and conducting and fostering research into the Australian military.

Summary of financial performance

4.4.37 The following section provides a comparison of the 2016–17 and 2017–18 key statements items reported by the AWM, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.5: Key financial statements items

Source: AWMs financial statements for the year ended 30 June 2018.

4.4.38 The increase in revenue from government relates to the appropriation funding provided to assist AWM with the digitisation of National Collection items at risk of technical obsolescence.

4.4.39 Total assets have largely increased as a result of an independent valuation of land and buildings during the year.

Key areas of financial statements risk

4.4.40 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of the AWM’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 is provided in Table 4.4.6. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.4.6: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and the Australian War Memorial’s financial statements for the year ended 30 June 2018.

Audit results

4.4.41 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Defence Housing Australia

4.4.42 The objective of Defence Housing Australia (DHA) is to provide housing and related services to members of the Australian Defence Force and their families, in line with Defence’s operational requirements. To meet these requirements, DHA is responsible for purchasing land and constructing properties on that land, and purchasing new and established properties. Each year, DHA sells a portion of its properties through a sale and leaseback program. Revenue generated from sale and leaseback activity provides DHA’s primary source of capital funding, and funds DHA’s capital program to acquire new properties.

Summary of financial performance

4.4.43 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by DHA and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.7: Key financial statements items

Source: DHA’s financial statements for the year ended 30 June 2018.

4.4.44 The decrease in revenue was attributable to the decrease in the proceeds from sale and leaseback of properties during the year due to the deterioration of market conditions and the decrease in the net gain from disposal of investment properties due to DHA’s decision not to sell as many investment properties in the year. This decrease was partially offset by a slight increase in housing services income due to the annual rent review increase and a higher proportion of properties being tenanted in areas.

4.4.45 The decrease in total expenses related specifically to the reduction in the cost of inventories sold which correlates to the decrease in sales. This has been partially offset by an increase in write down and impairment of assets during the year due to the deterioration in market conditions.

Key areas of financial risk

4.4.46 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of DHA financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.4.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.4.8: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and DHA’s financial statements for the year ended 30 June 2018.

Audit results

4.4.47 There were no significant or moderate unresolved audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Department of Veterans’ Affairs

4.4.48 The Department of Veterans’ Affairs (DVA) is the primary service delivery entity responsible for implementing programs to assist the veteran and defence force communities.

Summary of financial performance

4.4.49 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by DVA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.9: Key departmental financial statements items

Source: DVA’s financial statements for the year ended 30 June 2018.

4.4.50 The net cost of services has increased due to new shared service arrangements with the Department of Human Services for claims processing, and an increase in the cost of contractors and consultants for delivery of current modernisation reform projects within the department. Revenue from government increased mainly in respect to funding the shared service arrangements.

4.4.51 Total assets increased due to an increase in appropriations receivable to assist with the shared service delivery for the department in the future.

4.4.52 Total liabilities increased due to delayed payments for suppliers, which increased accrued accounts payable at year-end.

Table 4.4.10: Key administered financial statements items

Source: DVA’s financial statements for the year ended 30 June 2018.

4.4.53 The increase in total expenses is mainly attributed to the increase in the military compensation scheme provision following a review by the Australian Government Actuary.

4.4.54 DVA’s military compensation provision balance increased by $2.3 billion. The personal benefits provision is attributed to increases in permanent impairment outlays under the Military Rehabilitation and Compensation Act 2004 and the Safety, Rehabilitation and Compensation (Defence Related Claims) Act 1988.

4.4.55 The primary components of the increase in the liability are:

• opening balance adjustments of $1.3 billion, increasing the 2017 actuarial valuation due to actual claims experience and associated modelling changes; and
• adjustments of $1.0 billion in the current financial year resulting from actual claims and payments made which increased the provision by $309.0 million, and interest rate changes which increased the provision by $708.0 million.

4.4.56 The opening balance adjustments represent what the liability would have been at 30 June 2017 had all data at that point been available. These adjustments mainly comprised increased permanent impairment liability and increased incapacity and medical liabilities due to increased claims. Adjustments for current year claims mainly comprised the outstanding cost of claims reported between 1 July 2017 and 30 June 2018, offset by actual payments, and interest/discount factors.

4.4.57 The increase highlights the inherent volatility and complexity associated with the determination of a reliable best estimate valuation. Payments have been particularly high in the 2017–18 financial year as a result of both increasing claims experience, and a DVA initiative to clear a backlog of past claims for permanent impairment. The long tailed nature of the liability also means that it is particularly sensitive to changes in interest rates.

Key areas of financial statements risk

4.4.58 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of DVA’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.4.11, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.4.11: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the DVAs’ financial statements for the year ended 30 June 2018.

4.4.59 In June 2018, Auditor-General Report No. 52 2017–18 Efficiency of Veterans Service Delivery by the Department of Veterans’ Affairs tabled. The report made six recommendations relating to the management, quality and timeliness of DVA’s veterans’ rehabilitation and compensation claims processes, which were considered as part of the 2017–18 financial statements audit.

Audit results

4.4.60 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Comments on non-material entities

DHA Investment Management Limited

4.4.61 DHA IML was a wholly owned subsidiary of DHA. It was established on 14 December 2012. The principal activity of DHA IML was to act as the responsible entity of a managed investment scheme (DHA Residential Property Fund No. 1) and for this purpose DHA IML held an AFSL licence. This managed investment scheme was wound up in 2016–17. The DHA IML board resolved to wind up DHA IML in June 2018 and this decision was supported by a resolution of the board of directors of Defence Housing Australia on 29 June 2018. As a result the entity was not a going concern at 30 June 2018.

Emphasis of matter

4.4.62 The auditor’s report for DHA IML’s financial statements included an emphasis of matter paragraph to draw attention to the notes to the financial statements which disclosed that a resolution to wind up the company had been passed and that it was expected that winding up proceedings would commence in 2018–19 upon the cancellation of the company’s AFSL licence on 19 July 2018. As a result the financial report was drawn up on a non-going concern basis. Accordingly, the entity’s assets were recorded in the financial statements at their net realisable values and liabilities were recorded at their contractual settlement amounts.

4.5 Education and Training portfolio

Portfolio overview

4.5.1 The Department of Education and Training is the lead entity in the portfolio. The department has responsibility for working with state and territory governments, other government entities and a range of service providers to deliver education and training–related policy, advice and services.

4.5.2 In addition to the department, the portfolio includes six entities, excluding subsidiaries, with responsibility for improving the quality and consistency of education and research within Australia’s schools, vocational institutions and universities.

4.5.3 During the 2017–18 financial year the Australian Institute of Aboriginal and Torres Strait Islander Studies (AIATSIS) was transferred to the Prime Minister and Cabinet portfolio.

4.5.4 Figure 4.5.1 shows the Education and Training portfolio’s income, expenses, assets and liabilities.

Figure 4.5.1: Education and Training portfolio’s income, expenses, assets and liabilities⁴⁸

 

 

Source: 2017–18 CFS.

4.5.5 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Education and Training and other material entities.

Department of Education and Training

4.5.6 The Department of Education and Training (Education) is responsible for administering a number of programs to assist with the cost of child care, the Higher Education Loan Program (HELP), grants to schools, and supplementary funding to assist eligible universities to meet certain superannuation expenses for eligible current and former university employees.

Summary of financial performance

4.5.7 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Education, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.5.1: Key departmental financial statements items

Source: Education’s financial statements for the year ended 30 June 2018.

4.5.8 The increase in net cost of services is due to changes in the cost structure for payments related to the shared service arrangements and expenses associated with implementation of the new child care subsidy. Revenue from Government increased due to increased funding for the Family Day Care Integrity measure which aims to reduce fraudulent child care claims relating to family day care.

4.5.9 The decrease in assets is attributed to the $9.7 million write-off of the Australian Apprenticeship Management System that was under construction to replace the system currently in use for managing Apprenticeship payments. The liabilities have decreased in the current year due to the timely settlement of payments to the Service Delivery Office, compared to the prior year where payments were delayed due to the transition arrangements.

Table 4.5.2: Administered key financial statements items

Source: Education’s financial statements for the year ended 30 June 2018.

4.5.10 The increase in assets is due to an increase in the higher education loan receivable balance of $3.9 billion. The increase is due to $2.4 billion in new loans, $1.2 billion movement in the yield curve and $0.3 billion resulting from interest and actuarial adjustments.

4.5.11 The decrease in administered expenses in the current year is due to a $1.0 billon fair value loss resulting from the higher education loans receivable valuation. This is compared to a $6.1 billion fair value loss in the prior year. This reduction was driven by changes to indexation rates and the yield curve.

Key areas of financial statements risk

4.5.12 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Education’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.5.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.5.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and Education’s financial statements for the year ended 30 June 2018.

Audit results

4.5.13 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Research Council

4.5.14 The core responsibility of the Australian Research Council (ARC) is the delivery of policy and programs that advance Australian research and innovation globally to benefit the community. The ARC achieves this by providing strategic policy advice to government, managing the National Competitive Grants program and measuring research excellence at Australia’s universities by conducting research evaluations.

Summary of financial performance

4.5.15 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by ARC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.5.4: Departmental key financial statements items

Source: ARC’s financial statements for the year ended 30 June 2018.

4.5.16 The deficit attributable to the Government increased by $1.1 million in 2017–18 due to an increase in employee benefits of $2.0 million and consultancy services of $0.4 million. This was offset by a net increase to revenue of $1.3 million, comprised of $2.0 million funding received from the Department of Defence for the Per-and Poly-Fluoroalkyl Substances (PFAS) Remediation Research Program and a decrease of $0.7 million revenue received from Government.

Table 4.5.5: Key administered financial statements items

Source: ARC’s financial statements for the year ended 30 June 2018.

4.5.17 Grant expenses decreased in 2017–18 by $58.3 million and grants payable decreased by $69.9 million predominately due to the timings of grants approved by the management as part of its normal business processes. There was a reduction in supplier expenses of $10.0 million resulting from the Dementia Research Initiative no longer being paid in 2017–18. These three factors contributed to an overall reduction in losses and net liabilities.

Key areas of financial statements risk

4.5.18 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of ARC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.5.6. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.5.6: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the ARC’s financial statements for the year ended 30 June 2018.

Audit results

4.5.19 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Comments on non-material entities

Australian National University

4.5.20 The Australian National University (ANU) was set up in 1946 with a special charter – to give the nation a university that would ‘advance the cause of learning and research in general, and take its rightful place among the great universities of the world.’ The ANU has a 31 December year end.

New moderate audit findings

Communication and interaction with the HR department

4.5.21 Delays in the provision of human resources (HR) information for the purposes of the audit resulted in the modification of the audit approach. Furthermore, as the ANAO were not able to obtain data directly from the HR system, it was necessary to undertake additional work in order to verify the completeness and accuracy of the information obtained. It was also noted that the ANU Finance section did not perform a reconciliation of the year to date amounts recorded in the general ledger to reports generated from the HR system but relied on a fortnightly review of payroll expenditure journals as evidence of the accuracy of this balance.

4.5.22 While sufficient assurance was obtained that there were no material omissions or misstatements in the reported employee expenses or liabilities, the ANAO recommended that management strengthen its assurance processes over HR information recorded in the financial statements including more timely provision of information.

4.5.23 The ANU agreed with the finding and will work to ensure that the ANAO is provided with the required access to HR information in accordance with agreed audit timeframes, including the provision of full inquiry and reporting access logins to the HR system(s), for the 2018 audit.

ANU investment portfolio

4.5.24 Investments is a material balance for ANU, having a value of $1.6 billion at 31 December 2017. From 1 January 2017 ANU ceased to manage its investment portfolio in house and engaged the National Australia Bank’s NAB Asset Servicing (NAS) as its custodian.

4.5.25 The ANAO was unable to audit the ledger balances at the interim audit phase as the process of recording the balances in the general ledger had not been resolved until early 2018 for the financial year ended 31 December 2017. A total reconciliation of the complete balance in the general ledger comprising the NAS system and the investments held outside of the NAS had not been performed by the ANU at the time of the final audit phase. At the request of the ANAO a reconciliation was satisfactorily performed and no issues were noted. The ANAO performed additional control testing over the additions and disposals within the share portfolio with satisfactory results. The associated revenue and expenses were substantively tested with satisfactory results.

4.5.26 At the time of the interim audit phase, management had not requested a GS007 report on the controls implemented by NAS for December 2017. The December 2017 report was subsequently requested and obtained with no issues in the report that impacted the audit process. This report is required to be provided annually to assist with gaining an understanding of the internal control environment within NAS and the effectiveness of that environment. An Independent Assurance Report is provided to NAS in relation to the controls over custody and investment administration.

4.5.27 While a higher level Investment Policy Framework was presented to the Finance Committee in November 2017, the ANU had not formalised and documented the processes, procedures and framework within which ANU gains their assurance regarding the accurate record of the balances and the movements of the share portfolio in the general ledger and financial statements.

4.5.28 The ANU agreed with the finding and has undertaken a number of procedures that have addressed the issues raised. The ANAO will review ANU’s progress in addressing this issue as part of the 2018 audit.

4.6 Environment and Energy portfolio

Note a: The Commonwealth acquired 100 per cent ownership of Snowy Hydro Limited (SHL) on 29 June 2018. In accordance with the Public Governance Performance and Accountability Act 2013 (PGPA Act) the Public Governance, Performance and Accountability Rule 2014 was amended to prescribe Snowy Hydro Limited as a government business enterprise and amend the first reporting period as the period commencing on 29 June 2018 and ending on 30 June 2019. As a result no audit report was issued by the ANAO in 2018.

Portfolio overview

4.6.1 The Environment and Energy portfolio is responsible for sustainable management of Australia’s environment, adapting to the impacts of climate change, and improving the health of ecosystems. The Department of the Environment and Energy is the lead entity in the portfolio and is responsible for advising on, and implementing, environmental and energy policy to support the Government.

4.6.2 In addition to the Department of the Environment and Energy, there are nine entities (excluding one subsidiary) within the portfolio that are responsible for renewable energy regulation and generation, weather forecasting services, financing the clean energy sector, advice on climate change mitigation, and conservation of national reserves and the Great Barrier Reef.

4.6.3 Figure 4.6.1 shows the Environment and Energy portfolio’s income, expenses, assets and liabilities.

Figure 4.6.1: Environment and Energy portfolio’s income, expenses, assets and liabilities⁴⁹

 

 

Source: 2017–18 CFS.

4.6.4 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of the Environment and Energy (Environment), Bureau of Meteorology (BOM), Clean Energy Finance Corporation (CEFC), and findings related to non-material entities in the portfolio.

Department of Environment and Energy

4.6.5 The core areas of responsibility of the Department of the Environment and Energy (Environment) are advising the Government on environmental and energy policy; and managing the conservation, protection and sustainability of Australia’s natural resources, biodiversity, ecosystems, environment and heritage, and contributing to the national response to climate change. In addition, the department advances Australia’s interests in the Antarctic, manages environmental water use, and supports the reliable, sustainable and secure operations of energy markets.

Summary of financial performance

4.6.6 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Environment, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.6.1: Key departmental financial statements items

Source: Environment’s financial statements for the year ended 30 June 2018.

4.6.7 The department holds a provision for the restoration and clean-up of Australia’s bases in Antarctica and sub Antarctic regions which is revalued on an annual basis. The movement in the provision associated with the solid waste disposal arising from the restoration and clean-up resulted in an increase to the net cost of services as did an increase in contractor costs across a range of policy areas.

4.6.8 The increase in other comprehensive income arises from the revaluation increment following a revaluation of non-financial assets undertaken during 2017–18 and an increase in that part of the valuation of the Antarctic related provision that relates to building and infrastructure.

4.6.9 The increase in total assets and total equity is due to the revaluation completed over Environment’s non-financial assets in 2017–18; and progress payments made by Environment for the construction of the new Antarctic Icebreaker Nuyina.

Table 4.6.2: Key administered financial statements items

Source: Environment’s financial statements for the year ended 30 June 2018.

4.6.10 The increase in total expenses and corresponding total comprehensive loss is mainly attributable to the $443.3 million for the Great Barrier Reef 2050 Partnership program announced in the 2018–19 budget as well as increased impairment of water assets which is consistent with changes in market prices.

4.6.11 The increase in total assets administered on behalf of Government as well as net assets is due to an increase in investments. The Government acquired Snowy Hydro Limited through the purchase of shares from the New South Wales and Victorian state governments to increase its ownership from 13 per cent to 100 per cent for a purchase price of $6.114 billion. Additionally the value of the investment in the Clean Energy Finance Corporation increased due to an equity injection of $1.7 billion. The movement in Other Comprehensive Income reflects the change in valuation of administered investments excluding equity contributions.

Key areas of financial statements risk

4.6.12 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Environment’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.6.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.6.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and Environment’s financial statements for the year ended 30 June 2018.

Audit results

4.6.13 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Bureau of Meteorology

4.6.14 The Bureau of Meteorology’s core areas of responsibility are gathering weather, water and atmospheric observations in order to provide forecasts, warnings and long-term weather and climatic outlook.

Summary of financial performance

4.6.15 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the Bureau of Meteorology, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.6.4: Key departmental financial statements items

Source: Bureau of Meteorology’s financial statements for the year ended 30 June 2018.

4.6.16 The increase in the Bureau of Meteorology’s total assets was a result of the acquisition of internally developed software in 2017–18. This contributed to the increase in net cost of services from higher depreciation and amortisation expenses.

4.6.17 The increase in total liabilities was due to higher payables in relation to new projects created in 2017–18. Fluctuations in other balances reflect normal business activities.

Table 4.6.5: Key administered financial statements items

Source: Bureau of Meteorology’s financial statements for the year ended 30 June 2018.

4.6.18 Total administered income relates to income generated from the sale of third-party advertising on the Bureau of Meteorology’s website. The decrease in total administered income was due to less advertising activities in 2017–18. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.6.19 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of the Bureau of Meteorology’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.6.6. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.6.6: Key areas of financial statements risk

Source: ANAO 2017–18 audit results and the Bureau of Meteorology’s financial statements for the year ended 30 June 2018.

Audit results

4.6.20 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Clean Energy Finance Corporation

4.6.21 The Clean Energy Finance Corporation (CEFC) is responsible for the facilitation of increased flows of finance into the clean energy sector. The CEFC’s role is to invest with commercial rigour in a diverse portfolio across the spectrum of clean energy technologies that are solely or mainly Australian-based - either directly or indirectly through industry and the banking sector - that, in aggregate, have an acceptable but not excessive levels of risk relative to the sector. The CEFC is required to liaise with relevant persons and bodies, including the Australian Renewable Energy Agency, the Clean Energy Regulator, other Australian Government entities, and state and territory governments, for the purposes of facilitating its investment function. In the Investment Mandate 2016 (No. 2), the responsible ministers have also directed the CEFC Board to make available up to:

• $1.0 billion of investment finance over 10 years for the Reef Funding Program;
• $1.0 billion of investment finance over 10 years for the Sustainable Cities Investment Program; and
• $200.0 million for debt and equity investment through the Clean Energy Innovation Fund.

Summary of financial performance

4.6.22 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by CEFC and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.6.7: Key financial statements items

Source: CEFC’s financial statements for the year ended 30 June 2018.

4.6.23 The increase in the surplus attributable to Government is due to primarily a result of increases in interest income, trust distributions, establishment and commitment fees on investment book. Increases in other comprehensive income were primarily associated with gains in the market value of available for sale investments.

4.6.24 Total liabilities increased due to an increase in unearned income from fees received in advance on new investment arrangements entered into as at 30 June 2018. Total assets increased mainly as a result of CEFC’s utilisation of an additional $1.7 billion from the CEFC special account, recognised in the Department of the Environment and Energy’s financial statements, to fund the CEFC’s pipeline of contracted debt and equity investments.

4.6.25 The increase in equity is a result of the substantial deployment of equity funds drawn from the special account in the current financial year (funded through $1.7 billion of equity drawn from the CEFC Special Account, a current year surplus of $73.7 million and a net $28.1 million increase in unrealised gains and losses on assets carried at fair value).

Key areas of financial statements risk

4.6.26 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of CEFC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.6.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.6.8: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and CEFC’s financial statements for the year ended 30 June 2018.

Audit results

4.6.27 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Comments on non-material entities

Clean Energy Regulator

4.6.28 The core areas of responsibility of the Clean Energy Regulator (CER) are administering schemes legislated by the Australian Government that are designed to work together to provide economic incentives, backed up by robust data, to reduce greenhouse gas emissions and increase the use of renewable energy to achieve the acceleration of carbon abatement for Australia.

New moderate audit finding

Privileged User Management

4.6.29 The ANAO reported minor audit findings in 2015–16 which remained unresolved. In the current year these have been raised as a moderate finding as outlined below.

4.6.30 For the TechOne financial management information system (FMIS) database access management, the ANAO noted that logging and monitoring of privileged user activity at the application and database level was not occurring. Further for TechOne FMIS privileged user access management, the logging and monitoring of super user access activity did not identify that the park and post functionality had been accidentally turned off resulting in the same person having the ability to park and post their own journals.

4.6.31 Testing of network privileged user access management identified that privileged user accounts did not have an expiry date and no monitoring or review of privileged activity or events (other than logon/logoff) was occurring.

4.6.32 In the final audit phase of 2017–18, the ANAO identified that for key systems such as the Customer Relationship Management (CRM) logging and monitoring had not been implemented for privileged user activity. For the Renewable Energy Certificate Registry, monitoring had not been implemented over changes to fee structures and privileged users were not revalidated to ensure that new or existing users had access rights commensurate with job responsibilities, and are approved by an appropriate individual.

4.6.33 The CER has advised that it is implementing procedures to address the weaknesses in 2018–19. The ANAO will review the progress made by the CER to improve its privileged user management as part of the 2018–19 audit.

Director of National Parks

4.6.34 The Director of National Parks (DNP) is responsible for the sustainable management of the Commonwealth’s protected areas through conservation and appreciation of Commonwealth reserves. The DNP achieves its objectives through the provision of safe visitor access, the control of invasive species, and working with stakeholders and neighbours.

Unresolved moderate audit finding

Identification, valuation and classification of assets

4.6.35 The identification, valuation and classification of assets finding was first raised during the interim phase of the 2016–17 audit after undertaking site visits to the Kakadu and Booderee National Parks. The ANAO identified weaknesses in the identification, classification and valuation of assets and that the Kakadu National Park did not have an approved and implemented capital maintenance plan for the upkeep of its roads. These issues were not resolved during the 2017–18 audit process and the ANAO continued to identify weaknesses in both the asset register and the stocktake procedures.

4.6.36 DNP partially agreed with the ANAO’s assessment that the weaknesses identified continued to pose a moderate risk to the financial statements.

Resolved moderate audit finding

Financial statement quality control and preparation process

4.6.37 During the final phase of the 2016–17 audit, the ANAO identified that DNP did not have adequate processes in place to ensure the timely and accurate preparation of their 2016–17 financial statements. During the 2017–18 audit, the ANAO observed that DNP adhered to financial statement preparation timetables and has been able to meet Government reporting deadlines in relation to the 2017–18 financial statements. The ANAO continued to identify weaknesses in DNP’s quality assurance review processes which led to a number of presentation and disclosure adjustments.

4.6.38 Overall, from the testing performed the weaknesses identified during the 2016–17 final audit phase have been partially addressed. The ANAO reassessed and downgraded the finding to a minor audit finding, as the financial statement preparation process now poses a low financial management risk.

4.6.39 DNP partially agreed with the status of the finding citing that the recommendations from 2016–17 had been addressed.

4.7 Finance portfolio

Portfolio overview

4.7.1 The Finance portfolio is responsible for the preparation of the consolidated financial statements (CFS) of the Australian Government and a range of finance related functions that include providing the Australian Government with Budget policy advice on superannuation arrangements for government employees, asset sales and online service delivery initiatives.

4.7.2 Figure 4.7.1 shows the Finance portfolio’s income, expenses, assets and liabilities.

Figure 4.7.1: Finance portfolio’s income, expenses, assets and liabilities⁵⁰

 

 

Source: 2017–18 CFS.

4.7.3 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Finance.

Department of Finance

4.7.4 The Department of Finance (Finance) is the lead entity in the portfolio and is responsible for supporting the Government’s budget process and oversight of public sector resource management, governance and accountability frameworks. In addition, the department is responsible for the preparation of the annual CFS, which includes the whole-of-government and the general government sector financial statements and the Australian Government’s financial outcome.

Summary of financial performance

4.7.5 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Finance, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.7.1: Key departmental financial statements items

Source: Finance’s financial statements for the year ended 30 June 2018.

4.7.6 The improvement in the net cost of services and total comprehensive income is largely due to the one off provisioning of an insurance claim for the Manus Island class action in the previous year. The liability has decreased with settlement of this claim in 2017–18.

Table 4.7.2: Key administered financial statements items

Source: Finance’s financial statements for the year ended 30 June 2018.

4.7.7 Total other comprehensive loss increased largely due to the lower discount rates used for the superannuation liabilities valuation (as compared to 2017 where there was an increase in discount rates). The lower discount rate and other estimate adjustments affected the provision by around $6.7 billion, which explains the movement in liability.

4.7.8 Total assets increased due to additional contributions received from the Consolidated Revenue Fund and invested in the DisabilityCare Australia Fund and the Medical Research Future Fund managed by Finance, which increased funds held by $6.4 billion.

4.7.9 Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.7.10 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Finance’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.7.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.7.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results and Finance’s financial statements for the year ended 30 June 2018.

4.7.11 The performance audit report Auditor-General Report No.35 2017–18 Management of Special Appropriations was tabled during 2017–18 and was relevant to the financial management or administration of Finance. Additional disclosures were provided in the financial statements as a result of the audit.

Audit results

4.7.12 There were no significant or moderate unresolved audit findings arising from the 2016–17 or 2017–18 financial statements audits.

ASC Pty Ltd

4.7.13 The ASC Pty Ltd Consolidated Group (ASC) supports Australia’s naval defence capabilities. ASC built Australia’s fleet of Collins Class submarines for the Royal Australian Navy and is responsible for the ongoing design enhancements, maintenance and support of the Collins Class submarines through the in-service support contract.

4.7.14 ASC is also part of the alliance-based contract arrangement to deliver three Air Warfare Destroyers (AWDs) for the Royal Australian Navy. This alliance is made up of the Department of Defence, representing the Australian Government, ASC as the lead shipbuilder, and Raytheon Australia as the mission systems integrator.

4.7.15 On 29 June 2018, the Government announced that ASC’s subsidiary, ASC Shipbuilding Pty Ltd will be transferred to BAE Systems to build the next generation of frigates for the Royal Australian Navy. At the end of the build, ASC Shipbuilding Pty Ltd will return to Commonwealth ownership. This transfer has not yet occurred.

4.7.16 ASC is a proprietary company limited by shares registered under the Corporations Act 2001. The Minister for Finance and the Public Service is the sole shareholder minister on behalf of the Commonwealth of Australia.

Summary of financial performance

4.7.17 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by ASC and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.7.4: Key financial statements items

Source: ASC’s financial statements for the year ended 30 June 2018

4.7.18 The reduction in expenses mainly reflects the AWD project approaching completion, partially offset by increased submarine maintenance activity and inventory levels. The transfer and lease-back of key infrastructure assets to Australian Naval Infrastructure Pty Ltd (ANI) has increased operating lease expenses and reduced depreciation expenses.

4.7.19 The decrease in income reflects a decrease in revenue from the AWD project, as the project approaches completion, partially offset by an increase in revenue from submarine maintenance.

4.7.20 Liabilities are lower mainly due to the repayment of a $32 million government advance during 2017–18. Other movements in assets and liabilities mainly reflect the timing of receipts and payments for submarine maintenance and the AWD project.

Key areas of financial statements risk

4.7.21 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of ASC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 are provided in Table 4.7.5. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.7.5: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and the ASC’s financial statements for the year ended 30 June 2018.

Audit results

4.7.22 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Electoral Commission

4.7.23 The core areas of responsibility of the Australian Electoral Commission (AEC) are conducting federal elections and referendums, maintaining the Commonwealth electoral roll, administering political funding, and disclosure and provision of a range of electoral information and education programs, both in Australia and internationally.

Summary of financial performance

4.7.24 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the AEC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.7.6: Key departmental financial statement items

Source: AEC’s financial statements for the years ended 30 June 2018.

4.7.25 The significant decreases in the net cost of services and revenue from government are primarily due to no general election being held during 2017–18. This caused employee and supplier expenses to decrease, compared to 2016–17. The increase in assets is primarily due to an increase in appropriation receivables as a result of additional funding secured for the electoral integrity reforms.

Table 4.7.7: Key administered financial statements items

Source: AEC’s financial statements for the years ended 30 June 2018.

4.7.26 The significant decrease in administered expenses is due to no general election being held in 2017–18.

Key areas of financial statements risk

4.7.27 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of AEC’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.7.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.7.8: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and the AEC’s financial statements for the year ended 30 June 2018.

Audit results

4.7.28 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Naval Infrastructure Pty Ltd

4.7.29 On 8 March 2017, the then Minister for Finance approved the restructure of the ASC Group (ASC) into two separate Government owned entities, ASC Pty Ltd and Australian Naval Infrastructure Pty Ltd (ANI) (formerly known as ASC Engineering Pty Ltd, a subsidiary of ASC Pty Ltd). The Board of ASC approved the restructure on 22 March 2017, with the effective date of separation being 26 March 2017.

4.7.30 ANI holds and invests in infrastructure for the domestic manufacture and maintenance of naval vessels in support of the Australian Government’s continuous naval ship building program. ANI is a proprietary company limited by shares registered under the Corporations Act 2001. The Minister for Finance and the Public Service and the Minister for Defence are the shareholder ministers on behalf of the Commonwealth of Australia.

Summary of financial performance

4.7.31 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by ANI, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.7.9: Key financial statements items

Source: ANI’s financial statements for the year ended 30 June 2018.

4.7.32 The increase in expenses comprises the full year effect of depreciation on assets transferred from ASC and seven months of depreciation on the Techport Common User Facility assets acquired from Defence SA. There are also additional corporate costs as ANI establishes systems and a full staff profile. The increase in income predominantly reflects the full year effect of leasing assets transferred to ANI from ASC in late 2016–17.

4.7.33 The increase in assets reflects the acquisition of additional infrastructure assets during 2017–18, particularly the Techport Common User Facility.

Key areas of financial statements risk

4.7.34 The ANAO completed appropriate audit procedures on all material items. The ANAO also assesses the IT general and application controls for key systems that support the preparation of ANI’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.7.10. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.7.10: Key area of financial statements risk audit results

Source: ANAO 2017–18 audit results, and the ANI’s financial statements for the year ended 30 June 2018.

Audit results

4.7.35 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Future Fund Management Agency and the Board of Guardians

4.7.36 The Future Fund Board of Guardians, supported by the Future Fund Management Agency (together the Future Fund), is responsible for investing the assets of the Future Fund under the Future Fund Act 2006 and other investment funds under the Nation-building Funds Act 2008, the DisabilityCare Australia Fund Act 2013, and the Medical Research Future Fund Act 2015, for the benefit of future generations of Australians.

Summary of financial performance

4.7.37 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the Future Fund, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.7.11: Key financial statements items

Source: Future Fund’s financial statements for the year ended 30 June 2018.

4.7.38 The investment earnings for the Future Fund during 2017–18 were above the prior year. The return of 9.3 per cent (2017: 8.7 per cent) is above its target return of 6.1 per cent (CPI plus 4.5 per cent). The increase in return has led to the growth in the fund size at year end as all returns are re-invested.

4.7.39 The decrease in expenses is due to a reduction in investment management fees, largely due to lower performance fees accrued in the current financial year. The reduction is partly due to performance of some managers and a restructure of part of the portfolio leading to a greater proportion not being subject to performance management fees.

4.7.40 The increase in liabilities is from derivative liabilities, reflecting the fair value of the foreign currency contracts as at 30 June 2018.

Key areas of financial statements risk

4.7.41 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Future Fund’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.7.12, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.7.12: Key area of financial statements risk audit results

Source: ANAO 2017–18 audit results, and the Future Fund’s financial statements for the year ended 30 June 2018.

Audit results

4.7.42 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

4.8 Foreign Affairs and Trade portfolio

Portfolio overview

4.8.1 The objective of the Foreign Affairs and Trade portfolio is to make Australia stronger, safer and more prosperous by promoting and protecting its interests internationally and contributing to global stability and economic growth, particularly in the Indo-Pacific region.

4.8.2 The Department of Foreign Affairs and Trade (DFAT) is the lead entity in the portfolio and is responsible for providing foreign, trade and development policy advice and for leading the Australian Government’s international efforts to shape the regional and international environment.

4.8.3 Figure 4.8.1 shows the Foreign Affairs and Trade portfolio’s income, expenses, assets and liabilities.

Figure 4.8.1: Foreign Affairs and Trade’s portfolio income, expenses, assets and liabilities⁵¹

 

 

Source: 2017–18 CFS.

4.8.4 The following sections provide a summary of the 2017–18 financial statements audit results for DFAT, and Export Finance and Insurance Corporation. Where a performance audit was tabled during 2017–18 that was relevant to the financial management or administration of an entity, the impact of those observations on the audit approach are also discussed.

Department of Foreign Affairs and Trade

4.8.5 The Department of Foreign Affairs and Trade (DFAT) is responsible for providing foreign, trade and development policy advice and for leading the Australian Government’s international efforts to shape the regional and international environment.

Summary of financial performance

4.8.6 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by DFAT, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.8.1: Key departmental financial statements items

Source: DFAT’s financial statements for the year ended 30 June 2018.

4.8.7 Net cost of services has primarily reduced due to gains made on the sale of two overseas properties in 2017–18.

4.8.8 Total assets increased primarily due to overseas property revaluations resulting from favourable movements in property markets and foreign exchange rates. This increase also resulted in an increase in other comprehensive income.

Table 4.8.2: Key administrated financial statement items

Source: DFAT’s financial statements for the year ended 30 June 2018.

4.8.9 DFAT has a range of financial assets and liabilities the most significant of which are subscription assets and grant liabilities. The subscription assets represent membership rights DFAT holds on behalf of the Australian Government for international organisations like International Development Association (IDA) and the Asian Development Fund (ADF). The grant liabilities represent the obligations the Australian Government has in relation to its aid commitments with international organisations. Valuations of assets and liabilities resulting from the Australian Government’s contribution to the international organisations are undertaken on an annual basis.

4.8.10 The increase in total income is primarily due to revaluation of subscription assets driven by a combination of change in the underlying discount rates and new subscription replenishments during 2017–18. This has also resulted in an increase in the total asset base.

4.8.11 The decrease in DFAT’s administered expenses and liabilities was due to a combination of timings of the payments and the movements in the valuation of the Australian Government’s contribution to international organisations.

Key areas of financial statements risk

4.8.12 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of DFAT’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.8.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.8.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the DFAT’s financial statements for the year ended 30 June 2018.

Audit results

4.8.13 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Export Finance and Insurance Corporation

4.8.14 The Export Finance and Insurance Corporation (Efic) is responsible for facilitating and encouraging Australian export trade on a commercial basis. Efic provides financial support to selected Australia-based companies exporting or seeking to expand internationally.

4.8.15 The financial statements of Efic report the results of two accounts – the Commercial Account and the National Interest Account (NIA). The Commercial Account is used to account for the transactions for which Efic is directly accountable. Efic retains the profits and losses arising from these transactions and retained earnings are held as capital. The NIA is used for transactions that are entered into in the national interest. The Australian Government receives the net income from this account and Efic is reimbursed for any losses incurred.

Summary of financial performance

4.8.16 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by Efic for the Commercial Account and the NIA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.8.4: Commercial Account key financial statements items

Source: Efic’s financial statements for the year ended 30 June 2018.

4.8.17 The increase in income and expenses is reflective of normal business activity and attributable to increases in average interest rates on investments and borrowings. The minor increase in total comprehensive income is attributable to a decrease in operating expenses.

Table 4.8.5: National Interest Account key financial statements items

Source: Efic’s financial statements for the year ended 30 June 2018.

4.8.18 The decrease in total expenses is primarily attributable to debt forgiveness in 2016–17. The offsetting decreases in total assets and total liabilities is due to the repayment of debts to the NIA. No new loans agreements were granted for the NIA during the year. Loans from the Commercial Account represent $417.1 million of the National Interest Account Liabilities as at 30 June 2018.

Key areas of financial statements risk

4.8.19 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Efic financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.8.6. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.8.6: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the Corporation’s financial statements for the year ended 30 June 2018.

Audit results

4.8.20 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

4.9 Health portfolio

Portfolio overview

4.9.1 The Health portfolio covers a range of policy and program areas aimed at achieving better health and ageing outcomes for Australians; supporting equitable, efficient and high-quality health and aged care systems; and improving opportunities for better outcomes in sport.

4.9.2 The Department of Health is the lead entity in the portfolio and is responsible for achieving the Australian Government’s health priorities through the development of policy; administering programs and services, including Medicare, the Pharmaceutical Benefits Scheme and aged care; managing health expenditure; progressing reforms to Australia’s health system; and undertaking regulatory and compliance activities.

4.9.3 Figure 4.9.1 shows the Health portfolio’s income, expenses, assets and liabilities.

Figure 4.9.1: Health portfolio’s income, expenses, assets and liabilities⁵²

 

 

Source: 2017–18 CFS.

4.9.4 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Health (Health), the Australian Sports Commission (ASC), the National Blood Authority (NBA), the National Health and Medical Research Council (NHMRC) and the Australian Digital Health Agency.

Department of Health

4.9.5 The Department of Health’s (Health) core areas of responsibility are achieving the Australian Government’s health and ageing priorities through evidence-based policy, program administration, research, regulatory activities, and partnerships with other government entities, consumers and stakeholders.

Summary of financial performance

4.9.6 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by Health, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.9.1: Key departmental financial statements items

Source: Health’s financial statements for the year ended 30 June 2018.

4.9.7 The decrease in net cost of services resulted from lower expenditure on employee expenses and a range of supplier expenses due to cost constraints. The reduction in employee expenses resulted from a ten per cent reduction in staff numbers associated with the full year impact of voluntary redundancies from the prior year.

Table 4.9.2: Administered key financial statements items

Source: Health’s financial statements for the year ended 30 June 2018.

4.9.8 The increase in total administered expenses is due to a five per cent increase in personal benefits that was mostly driven by an increase in Medical Benefits payments.

4.9.9 Total administered income has increased due to a change in the funding arrangement with the creation of the Medicare Guarantee Fund (MGF) special account whereby the receipt of funding is recognised as revenue. This is in contrast to the previous funding arrangement where the 2016–17 funding was received as a special appropriation which is not recognised as revenue in the financial statements.

4.9.10 Administered assets were higher in 2017–18 due to unspent cash remaining in the MGF special account and an increase in the accrued recoveries revenue relating to delays in raising invoices to recover Pharmaceuticals Benefits Schemes (PBS) drug recoveries resulting from delays in data availability.

Key areas of financial statements risk

4.9.11 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Health’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017– 18 are provided in Table 4.9.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.9.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and Health’s financial statements for the year ended 30 June 2018.

Audit results

4.9.12 There were no significant or moderate unresolved audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Australian Sports Commission

4.9.13 The Australian Sports Commission (the Commission) is responsible for leading and supporting the development of a cohesive and effective sport sector that enables more people to play sport, and Australian athletes and teams to succeed on the world stage.

Summary of financial performance

4.9.14 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by the Commission, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.9.4: Key financial statements items

Source: The Commission’s financial statements for the year ended 30 June 2018.

4.9.15 The increase in net cost of services mainly related to grant payment funding for high performance athletes and redundancy and separation employee expense payments. In addition, the Commission increased spending on the ‘Move it AUS’ campaign resulting in increased supplier expenses primarily for advertising and media.

4.9.16 The increase in revenue from government was mainly due to funding assistance, to athletes, for the 2018 Gold Coast Commonwealth Games, the 2018 Special Olympics National Games and the Tokyo 2020 Olympic Games. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.9.17 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of the Commission’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.9.5. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.9.5: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the Commission’s financial statements for the year ended 30 June 2018.

Audit results

4.9.18 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

National Blood Authority

4.9.19 The core responsibility of the National Blood Authority (NBA) is to secure the supply of safe and affordable blood products, including through national supply arrangements and coordination of best practice standards within agreed funding policies under the national blood arrangements.

Summary of financial performance

4.9.20 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the NBA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.9.6: Key departmental financial statements items

Source: NBA’s financial statements for the year ended 30 June 2018.

4.9.21 The net cost of services increased by $2.4 million predominately due to an increase in supplier expenses for information communication and technology. Fluctuations in other balances are the result of normal business activity.

Table 4.9.7: Administered key financial statements items

Source: NBA’s financial statements for the year ended 30 June 2018.

4.9.22 The NBA is funded by States and Territories based on budgeted expenditure for the purchase of blood and plasma products and operational expenses.

4.9.23 Expenses have increased due to an increase in prices for fresh blood products and an increase in the quantity of collected plasma for fractionation as well as an increase in demand for plasma products.

Key areas of financial statements risk

4.9.24 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of NBA’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.9.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.9.8: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the NBA’s financial statements for the year ended 30 June 2018.

Audit results

4.9.25 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

National Health and Medical Research Council

4.9.26 The core responsibilities of the National Health and Medical Research Council (NHMRC) are raising the standard of individual and public health care within Australia; developing consistent health standards; supporting medical and public health research and training; and fostering consideration of ethical issues relating to health.

Summary of financial performance

4.9.27 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the NHMRC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.9.9: Key departmental financial statements items

Source: NHMRC’s financial statements for the year ended 30 June 2018.

4.9.28 The increase in total assets is due to expenditure on internally developed intangible assets including the new Research Grants Management System, Enhanced Reporting System, and website redevelopment.

4.9.29 Total liabilities has increased substantially due to three key factors:

• increased reliance on contractors in 2017–18 has led to an increase in accrued contractor expense of $2.1 million;
• an increase in recognised lease incentives resulting from new lease negotiations; and
• unearned income of $2.0 million primarily from the Medical Research Future Fund program which was signed late in the financial year.

Table 4.9.10: Administered key financial statements items

Source: NHMRC’s financial statements for the year ended 30 June 2018.

4.9.30 Total expenses has increased due to greater funding for Boosting Dementia Research and increased Medical Research Grants. Income has reduced due to a once off receipt of co-funding from the Australia Research Council in 2016–17 which did not re-occur in 2017–18. Total assets increased due to increased cash balance as a result of an increase in uncommitted grants funding in comparison to the prior year.

Key areas of financial statements risk

4.9.31 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of NHMRC financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.9.11. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.9.11: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and the NHMRC’s financial statements for the year ended 30 June 2018.

Audit results

4.9.32 The following table summarises the status of audit findings reported by the ANAO in 2016–17 and 2017–18.

Table 4.9.12: Status of audit findings

Source: Audit results 2017–18

4.9.33 For the finding listed below, the ANAO undertook additional audit procedures to gain reasonable assurance that the NHMRC 2017–18 financial statements were not materially misstated.

Unresolved moderate audit finding

User Access Management

4.9.34 During the 2016–17 audit, the ANAO’s testing of user access to NHMRC’s information technology (IT) systems, including the Financial Management Information System (FMIS), identified that external vendors have privileged user access to NHMRC’s IT Infrastructure (Network, Databases and Operating Systems) and the FMIS. The activities performed by these vendors were not logged and, as a result, no regular monitoring of user activities was performed by NHMRC. Additionally, there were no regular monitoring controls in place at NHMRC to ensure that vendors’ activities are compliant with NHMRC’s policy and procedures.

4.9.35 Users with privileged access to IT systems are able to edit and change data within systems and by-pass the controls designed to ensure appropriate segregation of duties. Ineffective monitoring controls increases the risk that unauthorised changes may be made to NHMRC’s IT infrastructure and compromise the security of systems and their data.

4.9.36 Initial advice from NHMRC indicated that it would implement processes and controls to address this issue in 2017–18. The ANAO reviewed measures implemented by NHMRC to address this issue as part of the 2017–18 audit and found that the risk has not been fully addressed. NHMRC has advised that a permanent solution will be implemented as part of the replacement of key IT infrastructure during 2018–19. The ANAO will continue to focus on this area to ensure it is appropriately addressed.

Comments on non-material entities

Australian Digital Health Agency

4.9.37 The Australian Digital Health Agency is committed to the delivery of world-leading digital health capabilities. The Agency is working with the health system to drive better health for all Australians, enabled by seamless, safe and secure digital health services and technologies.

Resolved moderate audit finding

Financial statements quality assurance process

4.9.38 During the 2016–17 audit, the ANAO identified weaknesses in the quality assurance review process and the preparation of work papers to support the financial statements. These weaknesses contributed to a delay in the signing of the 2016–17 financial statements.

4.9.39 For 2017–18 a detailed project plan and timetable was developed for the delivery of the financial statements. The financial statement process was delivered by the Australian Digital Health Agency within the agreed timeframes and was supported by a high level of executive input. This finding has now been resolved.

4.10 Home Affairs portfolio

Portfolio overview

4.10.1 The Home Affairs portfolio was established by the 20 December 2017 Administrative Arrangement Order (AAO). The portfolio brings together Australia’s federal law enforcement, national security, cyber security, transport security, criminal justice, emergency management, multicultural affairs and immigration and border-related functions.

4.10.2 The Department of Home Affairs is the lead entity in the portfolio and is responsible for managing the movement of non-citizens, implementing visa, citizenship, multicultural affairs, and refugee and humanitarian assistance programs, facilitating international trade and collecting border revenue. It also deals with national security and law enforcement policy and operations, transport security, critical infrastructure protection coordination, protective services at Commonwealth establishments and diplomatic and consular premises in Australia, cyber policy coordination, as well as emergency management and natural disaster assistance.

4.10.3 The Department of Home Affairs also includes the Australian Border Force, responsible for border, investigations, compliance, detention (facilities and centres) and enforcement functions, as well as Australia’s customs functions. In light of the portfolio’s focus on law enforcement and security, maintaining a high integrity culture is critical.

4.10.4 Figure 4.10.1 shows the Home Affairs portfolio’s 2017–18 income, expenses, assets and liabilities.

Figure 4.10.1: Home Affairs portfolio’s income, expenses, assets and liabilities⁵³

 

 

Source: 2017–18 CFS

4.10.5 The following sections provide a summary of the 2017–18 financial statements audit results for the Department of Home Affairs, other material entities and the finding related to the Australian Transactional Reports and Analysis Centre.

Department of Home Affairs

4.10.6 The Department of Home Affairs (Home Affairs) was established on 20 December 2017 as a central policy agency, providing coordinated strategy and policy leadership for Australia’s national and transport security, federal law enforcement, criminal justice, cyber security, border, immigration, multicultural affairs, emergency management and trade related functions.

4.10.7 The Department of Home Affairs includes the entirety of the former department of Immigration and Border Protection (DIBP). As part of the AAO’s dated 20 December 2017, it also includes the national security, emergency management, natural disaster relief and recovery and criminal justice functions from the Attorney-General’s Department; the Office of Transport Security from the Department of Infrastructure, Regional Development and Cities; multicultural affairs from the Department of Social Services; and the counter-terrorism coordination and cyber security policy functions from the Department of the Prime Minister and Cabinet.

Summary of financial performance

4.10.8 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the Home Affairs, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.10.1: Key departmental financial statements items

Source: Home Affairs’ financial statements for the year ended 30 June 2018.

4.10.9 In 2017–18, an independent valuation of the property, plant and equipment was undertaken resulting in a $35.2 million increase in the fair value of assets. This is reflected in increases to the total other comprehensive income, total assets and total equity.

4.10.10 Fluctuations in other balances are primarily associated with the additional functions assumed as a result of the establishment of Home Affairs on 20 December 2017. The 2016–17 comparative values relate to the former Department of Immigration and Border Protection.

Table 4.10.2: Key administrated financial statements items

Source: Home Affairs’ financial statements for the year ended 30 June 2018.

4.10.11 The increase in administered expenses and reduction administered assets is primarily due to the gifting of $245.7 million of public property to the Papua New Guinea government, with the closure of the Manus Island Detention Centre facility on 31 October 2017.

4.10.12 Administered income increased mainly due to increases in customs duty and the Passenger Movement Charge (PMC) collections. The $1.5 billion increase in customs duty primarily related to collections for tobacco and alcohol, with a 12.5 per cent increase in the duty rate on tobacco products on 1 September 2017. PMC collections increased by $105.9 million due to an increase in the rate being applied to tickets and the number of eligible people departing Australia and short-term visitors during 2017–18.

4.10.13 Administered liabilities have increased primarily due to liabilities associated with the memorandum of understanding with Papua New Guinea relating to welfare and support services on Manus Island and in settlement locations following the closure of the related regional processing centre in October 2017.

Key areas of financial statements risk

4.10.14 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of Home Affairs’ financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.10.3, including which areas were considered key audit matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.10.3: Key areas of financial statements risk

Source: ANAO 2017–18 audit results, and Home Affairs’ financial statements for the year ended 30 June 2018.

Audit results

4.10.15 The following table summarises the status of audit findings reported by the ANAO in 2016–17 and 2017–18.

Table 4.10.4: Status of audit findings

Source: Audit results 2017–18

4.10.16 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Home Affairs 2017–18 financial statements were not materially misstated. In 2017–18 one finding has been downgraded from a moderate to a minor finding.

Resolved moderate audit findings

Management of Privileged Security Users in the IT Network

4.10.17 The ANAO’s review of users with privileged access to the department’s networks during the 2016–17 interim audit identified weaknesses in the operation of the controls relating to terminating privileged user access and the use of these accounts. The weaknesses related to:

• the use of personal administrator accounts rather than a designated account for the running of scripted jobs;
• scripts to deactivate users for inactivity were not fully operational as there were instances identified with accounts active at the time of our audit despite greater than 90 days of inactivity; and
• domain administrator accounts with internet access. In protecting the related networks, department’s position is that this should not occur.

4.10.18 The 2017–18 interim audit confirmed that internet access had been removed from domain administrator accounts.

4.10.19 During the 2017–18 final audit phase, the ANAO performed testing to assess the remediated controls Home Affairs had in place surrounding monitoring of the use of privileged access and their timely removal. Based on the testing undertaken, the ANAO is satisfied that the remediation activities undertaken have been effective. This has resulted in this finding being resolved.

Fraud and Integrity Reporting

4.10.20 During the 2016–17 final audit, the ANAO reported that the reporting of fraud instances, including a breakdown of the various types of fraud and financial implications along with appropriate trend analysis over years had been limited and was on occasion provided to the Audit Committee by way of a verbal update. It was noted that the reporting to the Audit Committee was not sufficient to facilitate appropriate review and independent advice and assurance about the appropriateness of the department’s fraud control and anti-corruption as it related to its system of risk oversight and management as required by the Public Governance, Performance and Accountability Act 2013.

4.10.21 The ANAO recommended that the department strengthen reporting by: clearly defining data flows from divisions and IT systems used for the purposes of reporting; prioritising system enhancements; resolving data quality and data integrity issues; and implementing regular reporting of information with a focus appropriate analysis of the various types of fraud, implications, actions being undertaken to address identified instances and trend analysis to support an assessment of the performance of fraud control measures.

4.10.22 During 2017–18, the department had progressed the following initiatives:

• identification and analysis of the types of activities that may constitute fraud in the department’s context and identification of potential sources of data that may be in scope for reporting purposes;
• developed reporting of fraud instances and related analysis with reports presented to the March 2018 and subsequent Audit Committee meetings;
• developed standard operating procedures for compiling this report; and
• reviewed and agreed the reporting framework to be applied within the investigator management system currently being used.

4.10.23 While the department continues to advance the reporting, the ANAO has concluded that remediation activities have progressed sufficiently to downgrade the issue to a minor audit finding. The ANAO will continue to monitor and assess the developments in this area.

Australian Federal Police

4.10.24 The core areas of responsibility of the Australian Federal Police (AFP) are to: enforce Commonwealth law; contribute to combatting complex, transnational, serious and organised crime; countering the threat of terrorism; and to protect Commonwealth interests in Australia and overseas. The AFP also has responsibility for providing policing services to the Australian Capital Territory and Australia’s territories.

Summary of financial performance

4.10.25 The following section provides a comparison of the 2016–17 and 2017–18 key departmental and administered financial statements items reported by the Australian Federal Police, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.10.5: Key departmental financial statements items

Source: Australian Federal Police’s financial statements for the year ended 30 June 2018.

4.10.26 The increase in net cost of services of $40 million is due to a heightened threat and response level and investigative activity; the impact of the new Enterprise Bargaining Agreement, and a technical adjustment to the recognition of appropriation.

4.10.27 The increase in total assets is mainly attributable to the significant upgrade/replacement program across information, communication and technology hardware and software and other projects that are work in progress.

Table 4.10.6: Key administrated financial statements items

Source: Australian Federal Police’s financial statements for the year ended 30 June 2018.

4.10.28 The increase in total expenses is as a result of substantial increase in police equipment for other jurisdictions, including refurbishments and training equipment.

Key areas of financial statements risk

4.10.29 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of AFP’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2017–18 are provided in Table 4.10.7. Three moderate audit findings have been identified, or remain unresolved from prior years, relating to these key areas of risk.

Audit results

4.10.30 The following table summarises the status of audit findings reported by the ANAO in 2016–17 and 2017–18.

Table 4.10.8: Status of audit findings

Source: ANAO 2017–18 audit results.

4.10.31 For each of the findings listed below, the ANAO undertook additional audit procedures to gain reasonable assurance that the AFP’s 2017–18 financial statements were not materially misstated.

New moderate audit findings

Underpayment of superannuation on certain allowances

4.10.32 During 2017–18 AFP has identified unpaid superannuation expenses dating back to 2007, which resulted in the understatement of employee expenses and liabilities. AFP identified instances where superannuation was not correctly applied to allowances. At the time of completion of the ANAO audit the amount of underpayment has not been fully quantified. The ANAO will review and monitor AFP’s progress in addressing this matter as part of the 2018–19 financial statements audit.

Untimely removal and monitoring of FMIS privileged application process

4.10.33 During the 2017–18 interim audit the ANAO observed in four instances where privileged user access to the financial management information system (FMIS) was not removed on a timely basis. It was also noted that AFP did not have formalised monitoring of the validity of the activities performed by the users with privileged access to ensure that their activities are in line with the AFP policy. As a result of the extended period of privileged access there may be a risk of inappropriate activity being performed in the FMIS system. The ANAO will continue monitoring AFP’s progress in addressing this issue.

Unresolved moderate audit finding

FMIS user access provisioning and termination

4.10.34 It has been identified that the AFP did not have adequate controls around the review of position based access and has a significant number of users who had access to sensitive transactions. This can lead to increased risk of improper use or changes made to the system and master data. The ANAO has recommended system changes to limit access risk where possible and if not possible a formal risk assessment is undertaken with periodic reviews of access and implementation of monitoring of users with this access. The ANAO acknowledges the AFP has made progress in reviewing the appropriateness of the number of users with access to sensitive transaction codes. The remediation activities will be reviewed as part of the 2018–19 financial statements audit.

Resolved moderate audit findings

FMIS privileged application access

4.10.35 In 2016–17 the ANAO identified weaknesses in the management of AFP’s privileged user access to the FMIS. During the 2017–18 interim audit we confirmed that the AFP had implemented formalised processes to request, approve and remove access in a timely manner.

User access to FMIS generic accounts

4.10.36 In 2016–17 the ANAO identified that key users of the FMIS had access to various generic user accounts. During the 2017–18 interim audit we confirmed that access to the generic accounts had been removed with the exception of one account required specifically for SAP support. AFP has implemented controls in relation to the use of this account.

Australian Security Intelligence Organisation

4.10.37 The core areas of responsibility of the Australian Security Intelligence Organisation (ASIO) are protecting Australia, its people and its interests from threats to security through intelligence collection, assessment and advice to the Government.

4.10.38 Following the passage of the Home Affairs and Integrity Agencies Legislation Amendment Act 2018 on 9 May 2018 ASIO was transferred from the Attorney-General’s portfolio to the Home Affairs portfolio.

Summary of financial performance

4.10.39 The following section provides a comparison of the 2016–17 and 2017–18 key financial statements items reported by ASIO, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.10.9: Key financial statements items

Source: ASIO’s financial statements for the year ended 30 June 2018.

4.10.40 The increase in the net cost of services and revenue from Government was due primarily to budget measures providing additional funding for ASIO’s outcomes identified in the 2017–18 portfolio budget statements and portfolio additional estimate statements. The primary impact as a result of these measures was an increase in supplier expenses of $17.5 million, and an increase in employee expenses of $9.0 million as a result of increased staff levels.

4.10.41 The increase in total other comprehensive income is due to the revaluation of leasehold improvements, buildings and property, plant and equipment undertaken by ASIO in 2017–18. In accordance with ASIO’s accounting policies, revaluations are undertaken on a periodic basis on advice from experts engaged by ASIO. No such revaluation was undertaken in 2016–17.

4.10.42 The increase in total assets partially reflects the impact of the revaluation which increased the carrying value of each asset class revalued. The movement in this balance was also due to the impact of purchases of property, plant and equipment and intangible assets during 2017–18, offset by depreciation and amortisation for the period.

Key areas of financial statements risk

4.10.43 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that supported the preparation of ASIO’s financial statements. The ANAO focuses audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2017–18 are provided in Table 4.10.10. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.10.10: Key area of financial statements risk

Source: ANAO 2017–18 audit results, and ASIO’s financial statements for the year ended 30 June 2018.

Audit results

4.10.44 There were no significant or moderate audit findings arising from the 2016–17 or 2017–18 financial statements audits.

Comments on non-material entities

Australian Transaction Reports and Analysis Centre

4.10.45 The Australian Transaction Reports and Analysis Centre (AUSTRAC) is Australia’s financial intelligence unit with regulatory responsibility for anti-money laundering and counter-terrorism financing. AUSTRAC collects and transforms financial information into actionable intelligence that is used to assist in the disruption, investigation and prosecution of serious criminal activity including money laundering, terrorism financing, organised crime and tax evasion.

Resolved moderate audit finding

Processes and policies for accounting for assets under construction

4.10.46 During the 2016–17 final audit, weaknesses were identified in AUSTRAC’s process for recording capital charges as assets under construction, primarily relating to the development of software. There was no documented evidence of the review and approval of the timesheets by project managers that supported charges recorded as assets under construction arising from employee labour. In addition, there was limited information available to support capital charges, which may not have complied with AUSTRAC’s accounting policy, being recorded as assets under construction.

4.10.47 These weaknesses increased the risk that these charges may not have been recognised in accordance with AUSTRAC’s accounting policy.

4.10.48 During the 2017–18 audit, the ANAO observed that AUSTRAC had undertaken appropriate remediation action to address the weaknesses identified and this finding was downgraded to a minor audit finding during the interim audit phase, with the finding being resolved during the final audit phase. AUSTRAC implemented a revised standard operating procedure and approval process for timesheets in October 2017. The procedure requires that all employee timesheets that form the basis for capital charges are to be reviewed in detail by project managers prior to being recognised as assets under construction.