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. As set out in the AAWP, the ANAO prepares two reports annually that, drawing on information collected during audits, provide insights at a point in time to the financial statements risks, governance arrangements and internal control frameworks of Commonwealth entities. These reports provide Parliament with an independent examination of the financial accounting and reporting of public sector entities.

2. These reports explain how entities’ internal control frameworks are critical to executing an efficient and effective audit and underpin an entity’s capacity to transparently discharge its duties and obligations under the Public Governance, Performance and Accountability Act 2013 (PGPA Act). Deficiencies identified during audits, that pose either a significant or moderate risk to an entity’s ability to prepare financial statements free from material misstatement, are reported.

3. This report presents the final results of the 2018–19 audits of the Consolidated Financial Statements (CFS) and 247 Australian Government entities. It complements Auditor-General Report No. 46 2018–19 Interim Report on Key Financial Controls of Major Entities which focused on the interim results of the audits of 26 entities.

The Consolidated Financial Statements

4. The CFS presents the whole of government and the general government sector financial statements. The 2018–19 CFS were signed by the Minister for Finance on 14 November 2019 and an unmodified auditor’s report was issued on 14 November 2019.

Financial audit results and other matters

Quality and timeliness of financial statements preparation

5. The ANAO issued 240 unmodified auditors’ reports, including the CFS, as at 29 November 2019. A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting.

6. The ANAO noted an increase in findings relating to processes supporting financial statements preparation; reduced delivery of draft financial statements in line with entity financial statements project plans; and an increase in the number of audit differences reported to entities in 2018–19 compared to 2017–18. These observations indicate a reduction in the quality of the financial statements preparation processes and a need to enhance quality assurance frameworks over the financial statements process.

Timeliness of financial reporting

7. The financial statements were finalised and auditor’s reports issued for 82 per cent of entities within three months of the financial year end. On average it took entities an additional 39 days to table their annual reports in Parliament. Seventy-six per cent of entities, that are required to table an annual report in Parliament, tabled prior to the date the portfolio’s Senate supplementary budget estimates hearing commenced. Twenty per cent of entities tabled after the hearing date which includes three per cent of entities that had not tabled an annual report as at 29 November 2019.

Key audit matter reporting

8. 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. 46 and the Australian Government’s CFS. In 2018–19 a total of 60 key audit matters (KAM) were included across the 26 entities and five KAM were included in the CFS auditor’s report.

Financial sustainability

9. An assessment of an entity’s financial sustainability can provide an indication of financial management issues or signal a risk that the entity will require additional government funding. Our analysis concluded that the financial sustainability of the majority of entities was not at risk.

Summary of audit findings

10. A total of 184 findings were reported to entities as a result of the 2018–19 financial statements audits. These comprised three significant, 21 moderate and 160 minor findings. Three significant legislative breaches were also reported during 2018–19.

11. The highest number of significant and moderate findings continue to be in the categories of:

• compliance and quality assurance frameworks supporting program payments and financial reporting; and
• management of IT security and user access, in particular the management of privileged users.

Human resources shared services

12. A review of the provision of human resource (HR) functions across the Commonwealth noted that there is a variety of HR service models adopted and entities have adapted arrangements specific to organisational requirements. Overall, there is an opportunity to strengthen governance arrangements by incorporating greater detail in agreements relating to HR services. It is recommended that agreements clearly articulate roles and responsibilities and require service providers to issue formal certifications improving an entity’s understanding of control effectiveness and unmitigated risks. In addition in the absence of available benchmarking data, it is difficult for entities to determine what efficiencies have been gained from engaging in shared services arrangements.

Executive remuneration reporting

13. Following an amendment to the Public Governance, Performance and Accountability Rule 2014 (PGPA Rule) in April 2019, Commonwealth entities were required to include additional disclosure on executive remuneration in their 2018–19 annual report. While some variances were noted between the key management personnel disclosures in the financial statements and those in the annual report, all entities have included the additional disclosures.

Reporting and auditing frameworks

Changes to the Australian public sector reporting framework

14. Major changes in accounting standards are applicable in 2019–20 with the implementation of revised standards for 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 (FMIS) changes.

15. 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 including, for example, 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. In response, the Minister for Finance amended the Public Governance, Performance and Accountability Rule 2014 (the Rule) to require Commonwealth entities to make remuneration disclosures for key management personnel, senior executives and other highly paid staff in annual reports. The Minister for Finance also amended the Rule to require Commonwealth entities and companies to publish annual reports online.

Cost of this report

16. 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.

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 2018–19 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 (AASB 1049).

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 2018–19 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 2018–19 audit results, and the CFS for the year ended 30 June 2019.

Audit results

1.5 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits of the CFS.

Australian Government’s financial outcome for 2018–19

Operating result

1.6 The following key financial measures were reported for 2018–19:

• net operating balance was a surplus of $3.3 billion (2017–18: deficit of $8.4 billion);
• operating result was a deficit of $39.3 billion (2017–18: deficit of $4.1 billion); and
• comprehensive result (change in net worth) was a total decrease in net worth of $126.9 billion compared to a decrease of $26.1 billion in 2017–18.

1.7 The net operating balance has returned to surplus due to revenue growth (8.6%), driven by taxation revenue, exceeding growth in expenses (6%). The larger deficit in the operating result is due to increased losses on revaluation of Government securities, with lower discount rates having a significant impact on valuations.

1.8 The comprehensive result (change in net worth) deficit increased, this increase is predominantly driven by the valuation adjustment on superannuation liabilities, with a valuation adjustment of $92.6 billion in 2018–19 compared to an adjustment of $25.3 billion in 2017–18. The movement in the valuation of the superannuation liability is largely due to movements in discount rates and is further discussed at paragraph 1.14 – 1.20.

Net worth

1.9 The Australian Government’s net worth has changed from a net asset deficiency of $417.7 billion in 2017–18 to a deficiency of $544.6 billion in 2018–19. Figure 1.1 provides an analysis of the movement in net worth from 1 July 2018 to 30 June 2019.

Figure 1.1: Total changes in the Australian Government’s net worth in 2018–19

 

 

Source: ANAO analysis of 2018–19 CFS.

1.10 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 2018–19 CFS.

1.11 Figure 1.2 illustrates the total liabilities and assets of the Australian Government since 2012–13. Two significant components that impact the Australian Government’s total liabilities and total assets are the issue of Government securities, and the value of defined benefit superannuation liabilities. 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 2018–19 CFS.

Government securities

1.12 There has been a steady growth in net debt as a percentage of 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 2018–19 CFS.

1.13 The level of net debt held in Government Securities has grown by $51.6 billion during the year. The growth in net debt has led to increases in net interest payments from $12.2 billion in 2017–18 to $14.2 billion in 2018–19. 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

1.14 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 $416 billion as at 30 June 2019 ($314 billion as at 30 June 2018). The significant balances of the reported liability relate to the following schemes that are closed to new members:

• Commonwealth Superannuation Scheme ($95.5 billion);
• Public Sector Superannuation Scheme ($134.3 billion);
• Military Superannuation Benefits Scheme ($125.7 billion); and
• Defence Force Retirement and Death Benefits Scheme ($55.5 billion).

1.15 The primary reason for the increase in the liability is the fall in the discount rate; between 30 June 2018 and 30 June 2019. The long term nature of the superannuation liability means that small changes to the discount rate can have a large impact on the liability.

1.16 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.

1.17 The Future Fund Board of Guardians (the Board) 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.

1.18 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 2011–12 to 2018–19.

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

 

 

Source: ANAO analysis of 2018–19 CFS.

1.19 The TAL represents the best estimate of the assets required, together with investment earnings on those assets, that would be sufficient to meet the future unfunded superannuation benefit payments. As such, the discount rate used to calculate the present value of future payments for TAL purposes represents the expected investment return on Future Fund assets. The Australian Government Superannuation liability included in Figure 1.4 reflects the present value of future unfunded superannuation benefits payments discounted using the Commonwealth bond rate, in accordance with Australian Accounting Standards.

1.20 Figure 1.4 shows that the 2018–19 estimate of the TAL is $186.9 billion¹, which is above the current Future Fund net asset balance of $162.5 billion. 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.

Government Financing through Loans and Equity

Investments for policy purposes

1.21 The Australian Government reports on a number of fiscal aggregates including net operating balance and underlying cash. These aggregates exclude cash or accounting movements that are of an investment or financing nature, in particular, investments made for policy purposes and the fair value losses on these investments.

1.22 A number of investments made for policy purposes have elements of economic and social benefits in addition to providing commercial returns. There may be some benefits in segregating the commercial and non-commercial portions of the investments to better reflect the implications on key fiscal aggregates. If this approach was adopted, and where this would be consistent with accounting standards, the non-commercial portion would be reflected as an expense and impact these fiscal aggregates.

1.23 Two key items included in investments made for policy purposes are investments in public corporations and concessional loans.

Investment in public corporations (General Government Sector)

1.24 The Government has increased its investments in Commonwealth controlled entities. Consistent with reporting requirements, these investments do not impact net operating balance or underlying cash, as described in paragraph 1.21 above.

1.25 The majority of these investments are in entities that provide a positive real return to the Commonwealth and are therefore classified as equity injections.² The impact of the operations are not reflected in underlying cash unless dividends are received from the entities. The ongoing valuations of these entities are reflected in the net worth. If the valuation of these entities deteriorates (for example as a result of accumulating losses or the valuation of future cash flows associated with assets procured through equity injections being less than their purchase costs), the deterioration in the position will be reflected in the General Government Sector’s net worth but not impact on the underlying cash even if the deterioration was a predictable result of a non-commercial policy decision. Table 1.3 shows investments made in Commonwealth entities where the equity contributed is greater than $300 million (excluding Snowy Hydro Limited which was purchased from the NSW and Victorian State Governments).

Table 1.3: Commonwealth Entities contributed equity, net assets and GGS fair value

Source: ANAO analysis of 2018–19 CFS and entity financial statements.

Note a: The differential in these values is due to the land transferred held under finance lease by WSA Co Pty at nil value. The land has a value for GGS purposes.

Note b: Included as significant contributions are due in coming years.

Concessional loans

1.26 There has been a continual growth in loans provided by Government, with a large proportion of these loans being concessional. Concessional loans are loans provided on favourable terms, for example, the interest rate may be below the current market rate for loans of similar risk.

1.27 The Higher Education Loan Program (HELP) is the largest Australian Government concessional loan program which is recorded by the Department of Education but is managed by the Australian Taxation Office.

1.28 HELP provides financial assistance to students to remove up-front cost barriers to tertiary education through income contingent loans. These loans are indexed to CPI and repayments are linked to the ability to pay based on income thresholds.

1.29 When HELP loans are issued, they are recorded as an asset for accounting purposes at the amount the Government expects to be repaid. The amount not expected to be repaid is classified under ‘Other economic flows’ in the Operating Statement. Other economic flows mainly include revaluations of asset and liabilities. Under AASB 1049, other economic flows are included in some, but not all, fiscal aggregates reported in the CFS. In particular, they are not included in net operating balance and underlying cash. HELP loan amounts not expected to be repaid are not required by the Accounting Standards to be included in these two key fiscal aggregates.

1.30 The amounts not expected to be repaid (due to being income contingent) on new student loans each financial year since 2014–15 are provided in Table 1.4.

Table 1.4: Amounts not expected to be repaid on new HELP loans

Source: Australian Government Actuary reports.

1.31 The policy of making HELP and other student loans income contingent has a significant cost to the Australian Government. The fair value of student loans at 30 June 2019 was $51.7 billion compared to the value of the loans made of $63.7 billion. The main difference between the value of loans made and the fair value is the $15.7 billion impairment adjustment due to credit risk, offset by an increase in as a result of the yield curve movement based on 2018–19 actuarial assessment.³ The $15.7 billion reflects the accumulated cost to the Government of the making the loans and is not being reflected in the key fiscal aggregates of underlying cash and net operating balance.

1.32 VET Fee HELP has been transferred from the Department of Education to the Department of Employment, Skills, Small and Family Business, therefore management of HELP debts going forward will be split between the two Departments.

1.33 Since 2016–17, three new corporate Commonwealth entities have been established with the purpose of issuing concessional loans. These are in addition to the HELP loans managed by the Australian Taxation Office and other key Commonwealth entities providing loans and debt management being:

• Export Finance Australia (EFA) (formerly Export Finance Investment Corporation) was established in its current form as a separate Commonwealth Entity in 1991. EFA has well-recognised expertise and a track record in providing and managing a significant loan portfolio in pursuit of its objectives to support Australian based companies seeking to grow internationally and overseas infrastructure development.
• Australian Office of Financial Management (AOFM) was established in 1999 and undertakes debt management activities including the issuance of Government securities, such as, Treasury Bonds and Treasury Indexed Bonds. AOFM has extensive experience in the issuance, management and administration of debt

1.34 The new entities are the National Housing Financing and Investment Corporation (NHFIC), established 30 June 2018, the Regional Investment Corporation (RIC) established 8 March 2018 and the Northern Australia Infrastructure Facility (NAIF) established 1 July 2016. NHFIC provides finance to the community housing sector and has leveraged the expertise of Export Finance Australia which provides loan management services and other administrative support to NHFIC. In the year ended 30 June 2019, NHFIC raised $315 million through a bond issue to fund the significant portion of the loans issued. NHFIC reports the loan transactions in its financial statements and is exposed to the counterparty risks.

1.35 In contrast the NAIF and the RIC do not report loan balances and the primary objective of these entities is to assess loans for infrastructure projects and farm business loans which the Departments of Industry, Innovation and Science and Agriculture respectively enter into. The loans are reported in these departments’ financial statements. Due to the structure of the arrangements with each department, neither NAIF nor RIC is exposed to the counterparty risk arising from the loans. The RIC engages Bendigo Bank as a third party provider to provide loan management services. The NAIF utilises the services of Export Finance Australia to provide back office administrative support and expertise.

1.36 Since inception, as at 30 June 2019, these entities have either issued or recommended loans as set out in Table 1.5 below.

Table 1.5: Loan transactions during 2018–19

Source: ANAO analysis provided by entities and 2018–19 annual reports.

1.37 There is a significant overhead cost associated with establishing and maintaining a commonwealth entity irrespective of the size of that entity. For the period ended 30 June 2019, the reported number of staff, Key Management Personnel (KMP) and board members for each of the entities discussed above is set out in Table 1.6 including the total employee expenses cost and reported cost of KMP.

Table 1.6: 2018–19 summary of expenditure relating to employees, KMP and board members

Note a: Board members are included in the number of KMP.

Source: ANAO analysis of 2018–19 annual reports.

1.38 In 2018–19, the North Queensland Livestock Recovery Agency (NQLIRA), a non-corporate Commonwealth entity, was established to provide strategic leadership and co-ordination of the Commonwealth’s recovery and reconstruction efforts in the area of north, far north and western Queensland affected by heavy rainfall and widespread flooding in early 2019.

1.39 For the 2018–19 reporting period, NQLIRA was in the establishment phase. Nevertheless it has actively consulted with the RIC (and Department of Agriculture) on the establishment of RIC’s AgRebuild loan (North Qld flood) product, and with Queensland Rural and Industry Development Authority on the establishment and administration under the National Partnership Agreement of the Commonwealth’s $300 million restocking, replanting and on-farm infrastructure grant program. Going forward it will also be providing concessional loans through approved deposit-taking institutions.

1.40 Noting that there is significant expertise involved in the assessment and ongoing management of loans, there is an opportunity for government to draw on existing expertise and structures to provide these services as new initiatives are identified. The arrangements entered into by the above entities, indicate that opportunities have been utilised to draw on existing expertise and structures to provide back office and administrative support.

Table 1.7: Definitions of terms used

Source: Australian Bureau of Statistics (2015). Australian System of Government Finance Statistics: Concepts, Sources and Methods; AASB 101 Preparation of Financial Statements, paragraph 5 and 7; AASB 1049 Whole of Government and General Government Sector Financial Reporting, Appendix A; and Reserve Bank of Australia (2017). Glossary RBA. [online] Available at: <https://www.rba.gov.au/glossary/&gt; [Accessed 15 Nov. 2018].

Introduction

2.1 The Auditor-General is required to complete the financial statements audits of all Australian Government entities and controlled subsidiaries on an annual basis.⁴ This chapter summarises the results of the 2018–19 financial statements audits and provides commentary on specific topics which relate to the governance and administration of entities.

Summary of 2018–19 auditors’ reports

2.2 A comparison of the number and type of auditors’ reports issued by the Auditor-General and his delegates in 2017–18 and 2018–19 (as at 29 November 2019), including the CFS is included at Table 2.1. Additional detail relating to the financial reporting frameworks applicable to the Australian Government and the form and content of auditors’ reports is outlined in appendices 3 and 4.

Table 2.1: Summary of auditors’ reports issued and outstandinga

Note a: This table provides a summary of the results as at 29 November 2019.

Note b: As at 29 November 2019 the financial statements had not been finalised for the following entities: Gagudju Crocodile Hotel Trust; Gagudju Lodge Cooinda Trust; IBA Tourism Asset Management Pty Ltd; Kakadu Tourism (GCH) Pty Ltd; Kakadu Tourism (GLC) Pty Ltd; Northam Solar Project Partnership; Northern Land Council; and Tjapukai Aboriginal Cultural Park Partnership.

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

Note d: Subsequent to the 30 June 2019 it was identified that the National Land Council has two subsidiaries which are required to be audited by the ANAO for the year ended 2018–19 and prior year(s). These entities are the North Australia Aboriginal Corporation and the Northern Australian Aboriginal Charitable Trust. As at 29 November 2019, the 2018–19 and prior year audit(s) have not yet commenced, and are not included in the analysis provided by this report.

Source: 2017–18 and 2018–19 ANAO auditors’ reports.

Internal control environment

2.3 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.

2.4 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 the importance of these 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.

2.5 An effective internal control framework provides a level of assurance that entities are able to prepare financial statements that are free from material misstatement.

2.6 For the majority of entities, at the completion of the final audits, 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 16 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. For the Australian Digital Health Agency; the Department of Defence; and the Northern Land Council a number of findings were identified which reduced the level of confidence that could be placed on key elements of internal control and that financial statements can be prepared free from material misstatement.

Quality and timeliness of financial statements preparation

2.7 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 the Parliament, Ministers, 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’.⁶

2.8 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).

2.9 In order to provide relevant and reliable financial information to the users, entities should prepare quality financial statements in a timely manner to support meeting 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 the financial statements throughout the audit process.

2.10 Each year the ANAO reports on the quality of financial statements preparation to entities. Where findings are raised relating to weaknesses in controls and processes supporting financial statements preparation they are incorporated within the compliance and quality assurance category in the audit findings section of this chapter. A review of the findings relating to weaknesses in processes supporting financial statements preparation has been performed across the last four years.

2.11 At the completion of the 2018–19 financial statements audit, the ANAO reported one significant, four moderate and 14 minor findings relating to processes supporting financial statements preparation. This is an increase from the prior year (2017–18: nil significant, two moderate and eight minor findings) and represents the highest number of findings related to the quality of financial statements preparation in the past four years. The significant finding in 2018–19 was reported to the Australian Digital Health Agency and was the only significant finding in this category reported over the last four years. Further details of this finding have been outlined in chapter 4 paragraphs 4.10.33– 4.10.35.

2.12 In addition to the audit findings raised, commentary was included in the final management letters for a further 10 entities indicating that there were opportunities to improve financial reporting practices. In total, the ANAO reported to 28 entities findings or commentary relating to weaknesses in processes supporting financial statements preparation.⁷

2.13 In 2018–19, the ANAO assessed the timeliness and quality of financial statements preparation, the results of which are consistent with the increase in the number of financial statements preparation findings reported. Timeliness in preparation was assessed by comparing the date of delivery of the financial statements to agreed timeframes. The timeframe was established by entities and agreed with audit teams for the delivery of financial statements.

2.14 Timeliness in financial statements preparation declined compared to the prior year. Delivery of financial statements in line with the agreed timeframes was achieved by 69 per cent of entities (2017–18: 82 per cent), with a further 18 per cent (2017–18: nine per cent) delivered within one week. The remaining 13 per cent (2017–18: nine per cent) provided their financial statements within 13 days on average of the agreed timeframe (2017–18: 14 days).

2.15 The quality of financial statements preparation was assessed by considering the number of audit differences identified. Throughout the financial statements audit process, audit differences, other than those considered trivial, are collated. Entities are encouraged to adjust all audit differences. Where adjusted and unadjusted audit differences⁸ have been identified, details have been included in the relevant portfolio section of chapter 4.

2.16 The total number of audit differences in 2018–19 (adjusted and unadjusted) increased by seven per cent from 2017–18. There was a significant increase in the number of unadjusted audit differences in 2018–19 with 120 unadjusted audit differences reported (2017–18: 89). Of these unadjusted differences, 52 related to material entities (2017–18: 51). The unadjusted differences, individually and in aggregate, did not result in a material misstatement to the financial statements of the audited entities.

2.17 The decrease in timeliness, increase in audit differences and increase in findings indicate a reduction in the quality of financial statements preparation processes for a number of entities in 2018–19. The ANAO recommends that entities bring renewed focus to their quality assurance frameworks, to ensure that significant accounting policies, and estimates underpinning financial statements are reviewed as early as possible in the preparation process. In their governance role, audit committees are encouraged to actively support management through the critical evaluation of position papers and holding entities to account for delivering on agreed timetables. In addition, the provision of a detailed variance would support the committee’s review of financial statements at year-end.

Timeliness of financial reporting

2.18 The finalisation of financial statements preparation and audit is marked by the signing of financial statements and associated auditor’s report.

Figure 2.2: Timeframes for financial statements signing from the end of financial year^(a)

 

 

Source: ANAO data.

Note a: In 2018–19, the financial statements and auditor’s report for Note Printing Australia was signed in July 2019 and is included within one month category.

2.19 Figure 2.2 shows there has been a reduction in the percentage of financial statements signed and the issue of the associated auditor’s reports within two months of the reporting year end (2018–19: 27 per cent compared to 2017–18: 32 per cent). Eighty-two per cent of financial statements were signed and associated auditor’s report issued within three months of year-end (2017–18: 90 per cent). The ANAO issued 95 per cent (2017–18: 99 per cent) of auditor’s reports within two business days of the signing of the financial statements by the accountable authority.

2.20 Annual reports inform the Parliament, the community and other stakeholders about the performance of entities. The publication of the annual report containing the audited financial statements is a key means to meet accountability and legislative obligations. Of the 248 mandated financial statements audits, 187 are required to present annual reports to the responsible minister for tabling in the Parliament.

2.21 Annual reports are approved by the entity’s accountable authority before being provided to the Minister and tabled in Parliament. The PGPA Act section 43(4) states that annual reports are to be provided to the relevant Minister by the 15th day of the fourth month after the end of the reporting period. The Public Governance, Performance and Accountability (PGPA) review⁹ proposed earlier tabling of annual reports. If this is introduced entities may need to bring forward the preparation of financial statements.

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

 

 

Source: ANAO analysis.

2.22 Figure 2.3 shows the time in days between the issue of the auditor’s report to the:

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

2.23 The analysis shows, that accountable authorities approved 60 per cent (2017–18: 54 per cent) of annual reports within 10 days of the issue of the auditor’s report with an average of 12 days (2017–18: 15 days). The average days between the accountable authority’s approval of the annual report and tabling in Parliament was 28 days (2017–18: 28 days).

2.24 Twenty-nine per cent of entities tabled within 30 calendar days from the issue of the auditor’s report (2017–18: 28 per cent). The tabling of annual reports in Parliament occurred on average 39 days (2017–18: 43 days) after the auditor’s report was issued. There are 9 entities that are expected to table an annual report which have not tabled the report as at 29 November 2019.

2.25 Annual reports should be tabled in Parliament early enough to allow sufficient time for review before Senate supplementary budget estimates hearings. The Resource Management Guide 135 Annual report for non-corporate Commonwealth entities (RMG 135) section 18 indicates that it is best practice for annual reports to be tabled before supplementary budget estimates hearings if they occur before 31 October.

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

 

 

Source: ANAO analysis.

Note a: The remaining three per cent relates to annual reports yet to be tabled in Parliament

2.26 Figure 2.4 shows that, in line with best practice, 76 per cent (2017–18: 64 per cent) of annual reports were tabled before the date of the relevant supplementary budget estimates hearing date. A further four per cent tabled on the date of the portfolio’s hearing (2017–18: five per cent). There were three material entities (2017–18: 13) across three portfolios which tabled annual reports after the portfolio’s Senate supplementary budget estimate hearing date as listed in Table 2.2. The National Capital Authority did not table its annual report prior to its portfolio’s Senate estimates date in either 2018–19 or 2017–18. The remaining entities reported in the table below, for 2017–18, tabled prior to the portfolio’s Senate estimates hearing dates.

Table 2.2: Annual Reports tabled after the portfolio’s Senate supplementary budget estimate hearing for material entities

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 date is the first appearance for the portfolio at the 2019–20 Supplementary budget estimates hearing.

Key audit matters

2.27 ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701) has been applicable from 2016–17. While ASA 701 only requires KAM reporting for listed entities, the Auditor-General considers including KAM to be good practice for financial statements auditing. The Auditor-General adopted the inclusion of KAM in 2016–17 and this has continued, as appropriate, in 2018–19 for the 26 entities included in Auditor-General Report No. 46 Interim Report on Key Financial Controls of Major Entities and also in the CFS from 2017–18.

2.28 The entities for which KAM are included in addition to the CFS are:

• Australian Office of Financial Management;
• Australian Postal Corporation;
• Australian Taxation Office;
• Departments of: Agriculture; Communications and the Arts; Defence; Education; Employment, Skills, Small and Family Business; the Environment and Energy; Finance; Foreign Affairs and Trade; Health; Home Affairs; Industry, Innovation and Science; Infrastructure, Transport, Cities and Regional Development; Parliamentary Services; the 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;
• Reserve Bank of Australia; and
• Services Australia.

The audit of the Attorney-General’s Department, did not give rise to any KAM being included in its auditor’s report. Further details regarding each of these entities’ individual KAM are provided in chapter 4 of this report.

2.29 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 for 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.

2.30 In 2018–19, a total of 60 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.

2.31 The majority of KAM in 2018–19 related to the valuation assertion for assets and liabilities such as:

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

2.32 Other KAM included completeness and accuracy of revenue and expenses for benefits payments and other payments. The ANAO also included KAM in the auditor’s report for the CFS. There were five KAM identified which have been reported in Table 1.1.

2.33 Auditors’ reports are made public through inclusion in Commonwealth entities’ and Commonwealth companies’ 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. While KAM, do not of themselves, provide a separate opinion on items in the financial report, the auditor’s report includes a summary of how the key audit matter was addressed.

Financial sustainability

2.34 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.

2.35 The Joint Committee of Public Accounts and Audit (JCPAA) has conducted two recent inquiries into the ANAO’s reports to parliament in relation to financial statements.¹⁰ In the first report the committee recommended that:

the Department of Finance, in consultation with the ANAO work to develop appropriate and robust performance targets and 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.¹¹

2.36 The second JCPAA report recommended that:

the Australian National Audit Office consider reporting back to the Committee on how the rollout of digitised annual reports by the Department of Finance might assist in the development of performance targets or benchmarks to enable Commonwealth entities to assess their own financial sustainability against agreed parameters over time and against like entities.

2.37 The Department of Finance (Finance) has set up a portal¹² for capturing and reporting annual reports for all Commonwealth entities and companies. This portal allows information to be captured and tagged to enable users to compare and contrast financial results and mandatory annual reporting requirements across all entities. Finance included four financial ratios on the Transparency portal which are listed below. The four ratios and definitions as applied by Finance are:

• The Total Liabilities to Total Assets ratio indicates the level of ownership of the entity’s assets, but can also be used to gain an understanding of the entity’s net equity.
• The Financial Assets to Total Liabilities ratio indicates the extent to which an entity’s liabilities can be covered by its financial assets.
• The Current Ratio shows whether an entity’s assets expected to be recovered in no more than 12 months are greater than its liabilities that are expected to be settled in no more than 12 months (consistent with the Public Governance Performance and Accountability (Financial Reporting) Rule 2015). It is a liquidity ratio that indicates whether the entity is likely to be able to pay its short term liabilities as they fall due.
• The Capital Turnover Ratio indicates whether an entity is replacing its assets at a sustainable rate. That is, whether new or replacement assets are being purchased at a greater rate than they are being used.¹³

2.38 In the absence of government guidance, the ANAO has developed parameters based on generally accepted concepts of financial sustainability and applied these to the operating results and balance sheets of the 63¹⁴ material entities. The balance sheet ratios analysed below are consistent with the first two ratios developed by Finance as outlined above.

2.39 The ANAO has performed an analysis of operating results consistent with parameters used in prior years. These parameters¹⁵ are described in Table 2.3 and Table 2.4 below. In calculating the ratios a number of adjustments have been made to inputs to achieve a more meaningful indicator as noted below.

Analysis of operating results

2.40 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 the public resources made available to them efficiently and effectively.

2.41 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.

2.42 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.¹⁶ As a result, any entity in this category averaging a large deficit should be considered more closely.

2.43 Against this background, the ANAO analysed the operating results of all material entities over a five year period: 2014–15 to 2018–19. This analysis is based on reported surpluses or deficits after adjusting for unfunded expenses¹⁷, where relevant, highlighting the full cost of operations. Of the 63 entities considered in this analysis, 39 are not-for-profit and 24 are for-profit or not-for-profit entities which have quasi-commercial operations or departmental functions operating on a for-profit basis.

2.44 For the purposes of this analysis, material entities are grouped into three operating result categories as outlined in Table 2.3 below.

Table 2.3: Operating result category

Source: ANAO developed parameters.

2.45 Figure 2.5 demonstrates 43 per cent (2017–18: 49 per cent) of material not-for-profit entities were classified as achieving small average deficits or surpluses and managing within their breakeven mandate. Sixty-seven per cent (2017–18: 73 per cent) of for-profit/quasi-commercial entities recorded large average surpluses.

Figure 2.5: Operating result analysis

 

 

Source: ANAO analysis of material entities’ operating results.

2.46 Twenty-one per cent (2017–18: 18 per cent) of for-profit/quasi and 13 per cent (2017–18: 11 per cent) of not-for-profit entities have averaged large deficits and 44 per cent (2017–18: 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

2.47 For the period 2014–15 to 2018–19 the following for-profit entities recorded large average 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 the operating losses.¹⁸

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

2.49 The large average deficits of the Australian Federal Police¹⁹ and the Australian Security Intelligence Organisation²⁰ were mainly related to the impact of the valuation of employee provisions as a result of a decrease in the rate used to calculate the employee provisions in 2018–19.

2.50 Consistent with 2017–18, the large average deficit of the Department of Industry, Innovation and Science is related to the 2017–18 budget announcement where 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, as part of the ‘Maintaining Australia’s Optical Astronomy Capability’ measure.

2.51 One off factors that occurred in a prior year, and resulted in a significant deficit in that year have continued to have an effect on the five year average up to 2018–19 for two entities. 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 in 2017–18 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

2.52 As outlined in Figure 2.5, 44 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 (2017–18: 40 per cent). The following discussion focuses on the common drivers for these entities’ large average surpluses.

2.53 Cultural institutions represented a quarter of the entities in the large average surplus category.²¹ 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.

2.54 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, which resulted in an amount being recorded in revenue (in 2017–18), without a corresponding expense. This has impacted the average operating result over the longer term.

2.55 Changes to Administrative Arrangement Orders (AAO) can significantly impact the operating result of an entity in any year, including the periods immediately following the changes. The large average surpluses of two entities: the Australian Signals Directorate; and the Department of Infrastructure, Transport, Cities and Regional Development are the direct result of changes to the AAO in either the current or prior years. For these entities the timing of the AAO changes and the transfer of funding associated with those functions did not align with the related expenditure.

2.56 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 Research Council and Services Australia. 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.

2.57 A number of factors have contributed to the Department of Agriculture’s significant surplus over the four year period which has included an increase in revenue for biosecurity related cost recovery activities.²² 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.²³

2.58 The Australian Office of Financial Management has reported, in each of its last five annual reports that its surpluses over the past five years are largely due to incurring lower than anticipated operating expenses.²⁴

2.59 The transition of participants to the National Disability Insurance Scheme 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 in of participants than anticipated and lower utilisation of funds by participants which has resulted in expenses incurred for 2017–18 and 2018–19 being less than budgeted.²⁵

2.60 In 2017–18, the Australian Securities and Investments Commission recorded an annual surplus of seven per cent driven mainly by court cost recoveries arising from settlements with the Australia and New Zealand Bank and National Australia Bank over unconscionable conduct²⁶ in respect of the Bank Bill Swap Rate. This one off event continues to result in a large average surplus in 2018–19 of greater than one per cent. Similarly, in 2017–18 the Bureau of Meteorology 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. Again this one off transaction continues to have a residual effect resulting in a large average surplus.

2.61 The Department of Social Services has moved from the small average deficit or surplus category in 2017–18, to the large average surplus category in 2018–19. This surplus is related to resources received free of charge in 2018–19 ($17.1 million) for the Aged Care Gateway IT systems application development services work completed by the Department of Health during the 2018–19 financial year.²⁷

2.62 The National Health Medical Research Council significant surplus was a result of the increase in rendering of services revenue relating to the Medical Research Future Fund in 2017–18 and 2018–19. The Australian Government created the $20 billion Medical Research Future Fund in the 2014–15 budget to inject significant funds into the health and medical research sector to transform the health of Australians.²⁸

Balance sheet analysis

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

2.64 The ANAO analysed the balance sheet positions of material Australian Government entities as at 30 June 2019. 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 and are consistent with the ratios published by Finance.

• 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 which could indicate the need for a future capital injection from government.

2.65 Material entities have been grouped into the following categories:

Table 2.4: Balance sheet categories

Source: ANAO analysis.

2.66 Figure 2.6 presents the number of entities in each balance sheet category from 2015–16 to 2018–19.

Figure 2.6: Balance sheet analysis

 

 

Source: ANAO analysis of entity balance sheets.

2.67 Seventy per cent (2017–18: 75 per cent) of material entities had strong balance sheets in 2018–19. This indicates that there has been a deterioration in the balance sheet positions of material entities in 2018–19.

2.68 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 2015–16 to 2018–19, ratios for the Australian Taxation Office (ATO); Department of the Environment and Energy; and NBN Co Limited indicated a weak balance sheet position.

2.69 Consistent to the prior year, the ATO fell into the weak balance sheet category. In 2018–19, the slight decrease in total liabilities was offset by a large decrease in total assets, predominantly due to a decrease of $100.0 million in appropriation receivable.

2.70 The Department of the Environment and Energy balance sheet position continues to be impacted by the unfunded provision for restoration obligations in the Antarctic. In 2017–18, the department reported a less strong balance sheet and this was 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, also resulted in an improvement to the gearing ratio in 2017–18. The department’s operations in 2018–19 were consistent with 2017–18, however without the positive impact of the one off events that improved the gearing ratio in 2017–18, the balance sheet position has moved from less strong to weak.

2.71 NBN Co Limited is funded through a combination of equity and debt funding to construct the national broadband network. NBN Co Limited commenced draw down on the loan facility towards the end of 2017–18 with an additional $8 billion drawn from the loan facility during 2018–19. This has resulted in a weakened balance sheet with an increase in the debt to equity funding mix. The balance sheet position of NBN Co reflects the current stage of business maturity with significant upfront investment in the roll out of the network and customer activations prior to the Company becoming cash flow positive. The Company is forecast to become cash flow positive during 2022–23.

Executive remuneration

2.72 Following an amendment to the PGPA Rule in April 2019, Commonwealth entities were required to include additional disclosure on executive remuneration in their 2018–19 annual reports. The Department of Finance released two resource management guides that provide additional guidance to Commonwealth entities and companies.²⁹

2.73 The annual reports of Commonwealth entities are required to include additional remuneration disclosures for three staffing categories: key management personnel (KMP); senior executives and other highly paid staff. Commonwealth companies are only required to include information in relation to KMP.

2.74 The financial statements of all entities were already required to include disclosures on the total remuneration paid to KMP. The amendments to the PGPA Rule increased the transparency of these disclosures requiring KMP to be individually named and details of the remuneration to be outlined in a format prescribed in the PGPA Rule. In addition, entities were also required to report the average senior executives and other highly paid staff remuneration by band. The RMG 138 provides a definition for each category as outlined below:

Key Management Personnel (KMP) are defined consistent with the definition provided in AASB 124 Related Party Disclosures³⁰; KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. Commonwealth entities in preparing their annual financial statements would have decided which persons meet the definition of KMP and there should be consistency in reporting of the remuneration of KMP in an entity’s annual report;³¹

Senior Executives are Officials of a Commonwealth entity who are any of the following and who are not KMP.

(a) an official with a classification in Groups 9 to 11 of the table in Schedule 1 to the Public Service Classification Rules 2000; or

(b) an official with a position equivalent to an official covered by paragraph (a). For corporate Commonwealth entities that do not employ staff under the Public Service Act 1999, this would include an official other than a KMP who is responsible for making decisions, or having substantial input into decisions, that affect the operations of an entity; and

(c) an officer of the Australian Defence Force with a rank equivalent to a classification covered by paragraph (a). This would include Commodores, Brigadiers, and Air Commodores, and all officers of a higher rank.³²

Other Highly Paid Staff are Officials of a Commonwealth entity:

(a) who are neither KMP nor senior executives; and

(b) whose total remuneration exceeds the threshold remuneration amount for the reporting period.

2.75 The ANAO has audited the KMP note included in the financial statements and performed an assessment to confirm that the additional annual report disclosures were consistent with the financial statements. As the additional disclosures are not included in the financial statements the ANAO is not required to perform audit procedures over these additional remuneration disclosures. There are a number of entities for which the ANAO performs financial statements audits which are not required to report executive remuneration in their annual report. These include:

• subsidiaries of Corporate Commonwealth entities and Commonwealth companies which do not prepare annual reports, of which there are 54 entities;
• entities where the KMP are engaged in an honorary capacity or there are no KMP, of which there are four³³;
• High Court of Australia and the Australian National University and its three subsidiaries, which do not operate under the PGPA Act.

2.76 Excluding the above entities, there were 183 entities applying the executive reporting framework which included 16 Commonwealth companies and 167 Commonwealth entities. A number of entities have included additional disclosures to increase transparency in relation to the executive remuneration. In particular:

• the Department of Senate expanded the disclosures within the financial statements to include the disaggregated annual report tables for KMP, senior executives and other highly paid staff. As a result, audit procedures were performed over these disclosures; and
• a number of entities have included additional information within the footnotes of the table to explain unusual movements. For example the Departments of: Defence; Foreign Affairs and Trade; and Home Affairs have included additional information to explain unusually high remuneration driven by accommodation provided overseas and the associated fringe benefit tax implications.

2.77 As the format of the table included in the note is prescriptive, the ANAO noted that the footnotes had been utilised to enable the publication of annual reports within the Australian Government transparency portal, transparency.gov.au.

2.78 The ANAO observed that 32 entities have changed the number of KMP reported from 2017–18 compared to 2018–19. Three entities included additional KMP in their definition from the prior year. Twenty entities have reduced the number of KMP reported as a result of an organisational restructure and nine reduced the number of KMP following a reassessment of the role undertaken by each officer. The ANAO has reviewed each of the entities’ assessment of KMP. The reassessment of KMP relating to these 32 entities has resulted in a net reduction of officers included in the KMP disclosures with an average reduction of six officers per entity.

2.79 As noted above, the ANAO performed a review³⁴ of the disclosures in the annual report compared to the financial statements and identified a number of instances where there were variances between the disclosures which are listed below.

• The Australian War Memorial has incorrectly excluded council members from its annual report KMP disclosures. The council members were, correctly included in the financial statements disclosure.
• The financial statements for the Australian Institute of Health and Welfare and Tourism Australia correctly disclosed KMP. The annual reports included some senior executives who were classified as KMP in the senior executives table rather than the KMP table. As a result, the salary was banded and average salary was reported rather than each individual’s salary as required by the PGPA Rule.
• National Museum of Australia correctly disclosed KMP in its financial statements including council members. The council members were excluded from the KMP table in the annual report as they were considered below the reporting threshold. The rule does not establish a reporting threshold for KMP and requires the council members to be individually named in the annual report.

2.80 In addition, North Queensland Water Infrastructure Authority (NQWIA) had one KMP and correctly reported the KMP note within its financial statements that captures the total remuneration. NQWIA’s annual report provided a link to the KMP note within its financial statements and noted that its remuneration policies were consistent with the Department of Infrastructure, Transport, Cities and Regional Development. The level of detail in the financial statements was not consistent with the annual report disclosure requirements.

2.81 With the exception of the variances noted above, entities have adopted the new disclosures resulting in increased transparency.

Human resource services arrangements

2.82 Entities may enter into a shared service arrangement for the delivery of back-office support services such as accounting, human resources (HR), information technology, legal, compliance, purchasing and security. The arrangement can allow a number of organisations to share operational tasks, avoid duplication and provide economies of scale.

2.83 As reported in the 2017–18 Agency Resourcing Budget Paper No. 4:

Since 2013, the Australian Government has implemented initiatives through the budget process such as the Smaller Government Agenda, Contestability, Operation Tetris and the Efficiency Dividends to generate efficiencies of approximately $7.6 billion in savings.³⁵

The Government provided $500 million from the Efficiency Dividend, announced in the 2016-17 Budget, to establish the Modernisation Fund. The Government has announced specific initiatives in the 2017-18 Budget, to allocate the Modernisation Fund to reforms that deliver quality government services at lower cost and use leading technology and collaborative approaches to address complex problems facing society.³⁶

2.84 In addition, the Australian Government through the Modernisation Fund aims to³⁷:

• accelerate the transition of agencies to shared corporate services arrangements;
• transition 60 agencies to consolidate their core transactional corporate services (financial and human resources) and associated back office informational technical systems into one of the six corporate service hubs; and
• by 30 June 2021 achieve around 97 per cent of the average staffing level, in scope for the shared and common services program, receiving services from one of the hubs.

2.85 The Department of Finance stated that from the benchmarking exercise that have been undertaken ‘to date, the progress of the Program has drawn attention to a lack of consistent data on the cost and quality of current corporate activities, and variation in costing methodologies used by agencies to evaluate their transactional services.’³⁸ The Department of Finance has advised it is working with agencies to improve the benchmarking exercise and accuracy of data.

2.86 In view of the shared services agenda, the ANAO performed a review of HR service arrangements in place during the 2018–19 financial year. The review focused on the governance and control arrangements in place that provide assurance to entities receiving HR services.

2.87 There are three Commonwealth entities providing HR services by acting as delivery hubs offering services to entities outside their portfolios. These entities are the Departments of: Finance (through the Service Delivery Office (SDO)); Industry, Innovation and Science (Industry); and the National Museum of Australia.³⁹ The Department of the Treasury (the Treasury) provided services during 2018–19 however, it has since reduced its offering to only provide services within the portfolio. In addition to the hubs, there are a number of other HR services arrangements across the Commonwealth.

2.88 Table 2.5 below provides a summary of the HR service arrangements currently in place across the Commonwealth.

Table 2.5: Commonwealth human resource services arrangements^(a)

Note a: This table and associated analysis excludes arrangements arising as either the result of a recent entity creation or where entities were transitioning between service providers from 1 July 2019.

Note b: Seven of these entities only provide to one entity within their portfolio.

Source: ANAO analysis.

2.89 The above table shows that as at the date of this report there are 15 Commonwealth providers of HR services and 46 entities who receive HR services from one of these providers. In addition, there are four contracted non Commonwealth entity or company providers who provide HR services to 16 Commonwealth entities. The entities that receive services from a contracted non Commonwealth entity or company have not been considered in this analysis.

2.90 Auditor-General Report No. 25 2016–17 The Shared Services Centre reviewed the then Departments of: Education and Training; and Jobs and Small Business shared services governance arrangements with the Shared Delivery Office (SDO) (formerly the Shared Service Centre). This report made four recommendations, two of which are relevant to the establishment and ongoing management of shared service provider arrangements. These were:

• strengthening the role of the board and its sub-committees and improving the quality of information and communication provided to these boards; and
• putting in place transparent and sound processes for agreeing performance and cost parameters with clients and for monitoring and reporting the Shared Services Centre’s performance against these parameters.

Governance Arrangements

2.91 For the purposes of assessing the effectiveness of HR services arrangements across entities and in light of the above recommendations, an analysis was undertaken to assess the governance arrangements which support the various HR services structures across the Commonwealth. The ANAO’s observations are outlined below.

• For all arrangements set out in Table 2.5, the providing entity had established a formal agreement with the receiving entity.
• Ten of the 15 provider agreements clearly document the roles and responsibilities of the provider and the receiving entities.⁴⁰
• Five entities have undertaken a risk assessment over services they provide, these are: National Museum of Australia; and the Departments of: Health; Industry; the Treasury; and Social Services. The risk assessment undertaken by the Departments of Health; did not specifically identify the risks associated with the delivery of shared services. Apart from the National Museum of Australia, these risk assessments did not cover risks arising from ongoing IT systems administration in any detail.
• A formal certification on the effectiveness of controls is prepared by eight of the Commonwealth providers: the Attorney-General’s Department; the Departments of: the Environment and Energy, Health, Industry, and Social Services; Productivity Commission; Services Australia; and the SDO.
• Nine providing entities have established formal processes to communicate the results of relevant internal or external audits.⁴¹
• The National Museum of Australia; Departments of: Health, Industry, Social Services; Services Australia; and the SDO have a documented assurance framework over services provided which also address the three lines of defence.⁴²

2.92 For the purposes of preparing accurate financial statements, management of receiving entities should have an assurance framework in place that also addresses the three lines of defence, including the independent assessment of IT controls (where relevant). Of the 46 Commonwealth entities who receive HR services we observed that:

• fourteen entities receiving services from a hub and two entities receiving from other Commonwealth providers have undertaken a risk assessment over the services⁴³;
• fifteen entities have established an assurance framework over services provided under outsourced arrangements;
• thirty-seven entities advised that they had a clear understanding of what controls are implemented by the providing entity; and
• twenty-four entities communicated that they receive reports which allow them to obtain sufficient IT system assurance over the security, availability and reliability of the payroll system and data relating to HR services provided. Seven entities⁴⁴ communicated that they did not receive such reports, while other entities using the same providers advised that they did. It is the responsibility of the receiver to ensure that they are getting sufficient information from the provider to enable them to obtain an appropriate level of assurance over IT systems and controls.

2.93 A clear understanding of the roles and responsibilities in relation to IT management services provides visibility over the IT controls on which reliance is placed. The ANAO reviewed whether agreements between providers and receivers explicitly addressed the supporting IT management services being provided under the arrangement. This analysis showed that:

• four entities⁴⁵ included services covering IT change management, user provisioning and data backups;
• Services Australia and the Fair Work Ombudsman and Registered Organisations Commission Entity included services covering IT change management and data backups; and
• the Department of the Treasury included services covering IT change management and user provisioning.

2.94 As a result of the analysis above, it has been noted that Commonwealth service delivery hubs are more explicit and detailed in the agreements they have in place with their receiving entities. A greater level of detail around governance arrangements will facilitate a shared understanding of the controls and mutual obligations of participating entities and as a result there is less likelihood of receiving entities failing to obtain sufficient management assurance over payroll transactions recorded in their financial statements.

Efficiencies

2.95 One of the reasons for the Australian Government establishing corporate shared service hubs is to generate efficiencies. Of the 46 Commonwealth entities included in this analysis, six⁴⁶ of the receiving entities have performed an analysis on costs either prior to or post implementation and three⁴⁷ of these entities have undertaken an analysis both pre and post implementation.

2.96 A key cost in the utilisation of shared services is the initial establishment costs requiring additional resources to be directed to: assessing service provider options; transferring data; and establishing and embedding new policies, procedures and internal controls. Entities do not always receive additional funding for this activity. Of the Commonwealth entities that received services from more than one provider, since the decision to move to a HR service arrangement, on average they have changed providers twice. Entities have moved due to machinery of government arrangements or the HR providing entity making a decision to not continue to provide these services.

2.97 Old Parliament House (OPH) has had the largest number of HR services providers across the seven years since they were established. OPH recently moved from the Treasury to National Museum of Australia. The Treasury, as a service provider used software as a service (SaaS) arrangement⁴⁸, through which the HRMIS was hosted in the cloud. When OPH moved to the National Museum of Australia, they were able to transfer administrative access to the new HR provider without transferring data between systems as both providers utilised the same SaaS arrangement. As a result OPH was able to avoid the costs and risks associated with migrating data and establishing new system configuration settings. This example highlights the importance of careful planning around the IT systems architecture and configuration for shared services arrangements if efficiencies and savings are going to be fully realised.

2.98 The analysis indicates that there is variety of shared services arrangements across the Commonwealth as entities have adapted arrangements specific to organisational requirements. Overall, there is an opportunity to strengthen governance arrangements by incorporating greater detail in agreements relating to HR services. It is recommended that agreements clearly articulate roles and responsibilities, and require service providers to issue formal certifications improving the recipient entity’s understanding of control effectiveness and unmitigated risks. In addition in the absence of available benchmarking data, it is difficult for entities to determine what efficiencies have been gained from engaging in shared services arrangements.

Audit findings

2.99 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 an entity’s internal control processes or frameworks. Weaknesses in internal controls increase the possibility that an entity will not prevent or detect a material misstatement in its financial statements 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. Definitions of each category of audit finding is available at https://www.anao.gov.au/financial-statement-audit-information.

Table 2.6: Audit findings rating scale

Source: ANAO reporting policy.

2.100 A summary of findings identified for the period ended 30 June 2019 by category is presented in Table 2.7

Table 2.7: Audit findings by category for the period ended 30 June 2019

Source: ANAO compilation of findings.

2.101 In addition to the findings reported in Table 2.7 four legislative breaches were reported during 2018–19. Of these, three are significant and one non-significant. For further details in relation to the significant legislative breaches refer to paragraphs 2.133 – 2.135.

Information Technology control environment

2.102 The information technology (IT) control environment refers to the policies, procedures and controls that maintain the integrity of information and security of data in an entity. This includes:

• IT security management, which incorporates user access management, privileged user activity logging and monitoring as well as security configuration settings such as password controls; and
• IT change management and data centre and network operations, including management of backup and recovery processes.

The IT control environment is the environment in which applications run, and so it also supports the effective functioning of the application controls that may be relied on in the audit.

Figure 2.7: IT control environment audit findings 2015–16 to 2018–19

 

 

Source: ANAO data.

2.103 Eight new moderate findings were reported during 2018–19⁴⁹, of these one finding was resolved as part of the final audit phase.⁵⁰ Three moderate findings remained unresolved from prior years, two of these were first raised in 2016–17.⁵¹

2.104 Users with administrative privileges, commonly referred to as privileged users, are able to make significant changes to IT systems configuration and operations, bypass critical security settings and access sensitive information. To reduce the risks associated with this access, the Australian Government Information Security Manual (ISM) requires that privileged user access be appropriately restricted and when provided, that the access is logged, regularly reviewed and monitored. Six of the ten moderate findings relate to privileged user activity monitoring.

2.105 User access management includes the processes and procedures to ensure that only authorised users are granted access to systems and data, and that access is removed when it is no longer required. Three of the moderate findings relate to weaknesses in user access management.⁵²

2.106 The final moderate finding relates to the management of IT changes in the Department of Agriculture and Water Resources. Refer to paragraphs 4.1.20– 4.1.21 for further details.

2.107 IT security remains the most common area of weakness in the IT control environment, with almost 70% of findings relating to this area, and 90% of the moderate findings. It continues to require sustained focus by entities to ensure that the risks of unauthorised changes to systems and data and unauthorised data leakage are appropriately managed.

Compliance and quality assurance frameworks

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

Figure 2.8: Compliance and quality assurance framework audit findings 2015–16 to 2018–19

 

 

Source: ANAO data.

2.109 There are two new significant audit findings reported in 2018–19 relating to:

• the Department of Home Affairs — non-compliance with the framework in place for visa and citizenship quality management which is designed to ensure the effective identification and management of emerging business risks relating to assessment and issuance of visas and citizenship⁵³; and
• Australian Digital Health Agency — control weaknesses in contract and supplier management and financial reporting processes resulted in material adjustments being identified by the ANAO and has highlighted weaknesses in the integrity of the financial reporting process. For further details refer to paragraphs 4.10.33– 4.10.35.

2.110 The six moderate findings shown in Figure 2.8 relate to weaknesses in quality assurance processes supporting financial statements preparation and risk management practices relating to loan facilities. There are two new moderate finding relating to the Department of Communication and the Arts and the Northern Land Council⁵⁴ and four unresolved moderate findings from prior years.⁵⁵ Of the unresolved findings, one has remained unresolved since 2016–17: Streamlined Access to Scheme — Defined Programs relating to the National Disability Insurance Agency.

2.111 Of the minor findings, 17 were raised in 2018–19. Two of the four minor findings raised in prior years have been unresolved for two years.

2.112 There has been a significant increase in financial statements preparation findings compared to the prior year. One significant, four moderate and 16 minor findings related to weaknesses in financial statements preparation processes.⁵⁶ (2018: two moderate; eight minor).

2.113 The increase in financial statements preparation findings is accompanied by an increase in the number of audit differences and a decrease in the timeliness of financial statements preparation in the current year. Further details can be found in paragraphs 2.7 – 2.17.

Accounting and control of non-financial assets

2.114 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 2.9: Accounting and control of non-financial assets audit findings 2015–16 to 2018–19

 

 

2.115 The significant audit finding was first reported in 2017–18 and relates to the Department of Defence’s management and monitoring of specialist military equipment and inventory balances. Defence has commenced remediation of this issue and will continue to refine the reconciliation processes in 2019–20. Refer to paragraphs 4.4.22 – 4.4.24 for further details.

2.116 One new moderate finding was reported in 2018–19 and relates to completeness and accuracy of Defence Housing Australia’s lease data. Refer to paragraphs 4.4.48 – 4.4.49 for further details. The moderate finding reported in 2016–17 to the Director of National Parks remains open.⁵⁷

2.117 Seven minor findings relate to weaknesses in asset capitalisation processes, demonstrating the need for entities to further develop processes for the management and accounting of assets under construction.

2.118 Other weaknesses in this category for 2018–19 relate to:

• valuation adjustments; assessments for impairment of assets and restoration obligations;
• data management and integrity;
• inventory management; and
• stocktake procedures.

Revenue, receivables and cash management

2.119 Revenue and receivables consist of Parliamentary appropriations, taxation revenue, customs and excise duties and administered levies. Commonwealth entities also generate revenue 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 2.10: Revenue, receivables and cash management audit findings 2015–16 to 2018–19

 

 

2.120 Consistent with the prior two years, there are no significant or moderate audit findings reported in this category. Fifteen minor findings are new in 2018–19. The remaining two minor findings have been outstanding for one year.

2.121 Ten of the open findings relate to cash management controls. Cash controls are core processes expected to be mature practices at every entity. The weaknesses in this category include:

• timeliness and completeness of reconciliations;
• bank account withdrawal processes and the updating of account signatories; and
• processes supporting completeness and accuracy of reported revenue.

Human resource financial processes

2.122 Human resources encompass the day-to-day management and administration of employee entitlements and payroll functions. Employee benefits represent the most significant departmental expenditure for most Commonwealth entities, and the associated liability is subject to estimates and judgements in inputs.

2.123 Human resource transactions are high volume with both automated and manual processing. As a result, any control weaknesses can result in systematic errors increasing the risk of material misstatement.

Figure 2.11: Human resources financial processes audit findings 2015–16 to 2018–19

 

 

Source: ANAO data.

2.124 Two of the moderate audit findings open at the end of 2018–19 relate to weakness in quality assurance and controls over human resource processes resulting in the underpayment of superannuation on certain allowances.⁵⁸ In 2018–19, a number of entities also identified a possible exposure to liability for superannuation on allowances arising from a lack of clarity in employment contracts and enterprise agreements. The magnitude of the potential underpayments highlights the need for a strong control environment to prevent systemic errors.

2.125 The remaining moderate finding was previously classified as a minor audit finding and was upgraded due to issues that remained unaddressed from prior years.⁵⁹

2.126 The increase in minor audit findings in 2018–19 related to weaknesses identified regarding commencements and terminations of employees and the monitoring of controls over payroll processing and reporting. Five minor findings have been unresolved for at least two years. Of these, two have been unresolved for more than three years.

Purchases and payables management

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

Figure 2.12: Purchases and payables management audit findings 2015–16 to 2018–19

 

 

Source: ANAO data.

2.128 As illustrated by Figure 2.13, there are consistently no significant or moderate findings in this category, indicating that controls in this area are well established. Five of the minor audit findings in this category relate to weaknesses in the management and timely acquittal of credit cards.

2.129 All eight minor audit findings unresolved at 2018–19 were raised during the current financial year. Common weaknesses in this category over the four year period between 2015–16 and 2018–19 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.

Other audit findings

2.130 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 regarding presentation and disclosure in the financial statements.

Figure 2.13: Other audit findings 2015–16 to 2018–19

 

 

Source: ANAO data.

2.131 The National Disability Insurance Agency moderate finding was first reported in 2016–17 and was downgraded to a minor audit finding during the final audit phase of 2018–19. Further details can be found in paragraphs 4.16.35 – 4.16.40.

2.132 Nine of the minor findings were raised in 2018–19 are new and two remain unresolved from the prior year. The findings in this category related to weaknesses in:

• segregation of duties between processing and approving of manual journals;
• the formalisation of corporate documents including agreements with third parties and internal policies; and
• fraud risk assessments and reporting of fraud to those charged with governance.

Legislative Compliance

2.133 In accordance with ANAO policy⁶⁰, significant legislative breaches are reported to Parliament consistent with the reporting of significant and moderate audit findings. Significant legislative breach include: instances of significant potential or actual breaches of the Constitution; and instances of significant non-compliance with the entity’s enabling legislation, legislation that the entity is responsible for administering, and the PGPA Act.

Figure 2.14: Significant legislative breaches 2015–16 to 2018–19

 

 

Source: ANAO data.

2.134 There were two new significant breaches reported during 2018–19. The first relates to the Northern Land Council’s failure to fulfil its responsibilities for reporting its subsidiaries as required by the financial framework. The second relates to deficiencies in Wreck Bay Aboriginal Community Council’s record-keeping and governance arrangements.⁶¹

2.135 The unresolved significant breach was first raised in 2012–13 and related to the Northern Land Council’s non-compliance with the Aboriginal Land Rights (Northern Territory) Act 1976. This Act establishes the Council’s responsibilities for payments in relating to Aboriginal land, requiring payment of an amount equal to amounts received to, or for the benefit of, the traditional owners of the land, within six months after that amount is received through the royalty trust account. Instances of non-compliance continue to occur as not all of the funds in the Council’s royalty trust account had been reconciled and distributed to traditional owners, within the agreed timeframe. Further details regarding the Northern Land Council’s significant breaches can be found in chapter 4 (paragraphs 4.15.28 – 4.15.31 and 4.15.38 – 4.15.43).

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 financial reporting requirements for Commonwealth entities. These are contained in the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the FRR). The FRR 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 2019–20 are illustrated in Appendices 3 and 4 of this report.

Changes to the Australian public sector reporting framework

Changes in the financial framework

3.6 The Independent Review into the operation of the Public Governance, Performance and Accountability Act 2013 and Rule (the PGPA Review), released in September 2018, made a number of recommendations, the responses to which will impact the presentation and preparation of financial statements. The PGPA Review mirrors recommendations made by the Joint Committee of Public Accounts and Audit (JCPAA) in 2017⁶² in response to the Auditor-General’s report number 33 (2016–17) Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2016.

3.7 The Department of Finance has undertaken a number of initiatives in response to the PGPA Review including the development of a ‘Transparency Portal’ for the publication and utilisation of annual reports, the preparation of a Financial Statements Better Practice Guide, and amendments to the PGPA Act in relation to reporting on executive and highly paid staff remuneration.

Transparency Portal

3.8 The Transparency Portal⁶³ (the Portal) is an online digital reporting tool for the publication and presentation of all Commonwealth company and Commonwealth entity annual reports. The Portal was opened for public use in March 2019.

3.9 The portal has the functionality to:

• provide a single point of access for all Commonwealth company and Commonwealth entity annual reports;
• support compliance with the Commonwealth financial reporting framework through the use of data sets based on the minimum financial reporting and disclosure requirements of the PGPA Act and Financial Reporting Rule;
• enable portal users to search for and compare financial statements data between entities and between years using viewer generated tables and graphs;
• perform financial ratio analysis with the portal currently providing users with ratios for total assets to total liabilities and financial asset to liabilities; and
• have entities upload corporate plans and portfolio budget statements.

3.10 In April 2019, the Finance Minister amended the PGPA Rule⁶⁴ to require all Commonwealth companies and Commonwealth entities to publish their 2018–19 annual reports on the Portal. The Rule does not require entities to upload corporate plans or portfolio budget statements.

Financial Statements Better Practice Guide

3.11 The Department of Finance has published a Financial Statements Better Practice Guide65 as a practical resource to support staff in the financial statements preparation process. The guide includes draft timetables, compliance checklists, a range of administrative templates and practical guidance such as how to prepare an accounting position paper and what sort of information an auditor is likely to request.

Reporting of Executive Remuneration

3.12 The PGPA Review and JCPAA⁶⁶ recommended that increased disclosure of executive and highly paid staff remuneration would be beneficial to users of Commonwealth annual reports and allow for increased transparency.

3.13 In April 2019 the Minister for Finance amended the PGPA Rule⁶⁷ to require Commonwealth entities⁶⁸ to disclose in the annual report remuneration of:

• key management personnel;
• senior executive staff in aggregate by $25,000 band starting from a threshold of $0 to $220,000; and
• other highly paid staff in aggregate by $25,000 band starting from a threshold of $220,000.

Performance framework

3.14 The PGPA Act provides the basis for the Commonwealth performance framework. Commonwealth entities are required to publish planned financial and non-financial performance information with the aim of providing more transparent and meaningful information to the Parliament and the public.

3.15 The PGPA review recommended the Finance Minister, in consultation with the JCPAA, should request that the Auditor-General pilot assurance audits of annual performance statements to trial an appropriate methodology for these audits.

3.16 On 21 August 2019, the Minister for Finance requested that the Auditor-General conduct a program of pilot assurance audits of annual performance statements of Commonwealth entities subject to the PGPA Act, in consultation with the JCPAA. The Auditor-General responded on 14 November 2019, agreeing to the request and proposing to conduct a pilot to audit the 2019–20 performance statements of three entities.⁶⁹

3.17 The ANAO completed three performance audits covering elements of 10 individual entity performance statements. The results are published in three Auditor General Reports: Implementation of the Annual Performance Statements Requirements 2015–16⁷⁰, 2016–17⁷¹ and 2017–18.⁷²

Changes to accounting standards

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

Revenue

3.19 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.⁷³ 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.

3.20 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 Customers74, 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

3.21 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.

3.22 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 individual right-of-use assets, 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.

3.23 The Department of Finance have issued a positon paper Implementation Options for AASB 16 Leases75 which outlines the Commonwealth 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.

Data Analytics Strategy 2018–20

3.24 Auditors in the private and public sectors are increasingly using data and analytics to better identify financial reporting, fraud and operational business risks, and tailor the audit approach to deliver more targeted risk-based audits. By using a data-enabled approach, audit outcomes are able to be improved through the automation of procedures and analysis of relationships between variables.

3.25 The ANAO released its Data Analytics Strategy 2018-20 in March 2018, looking at how data analytics can be used to enhance audit quality and efficiency. The need to remain responsive to key technology and data changes is critical to the delivery of our work to Parliament, specifically in understanding and analysing how government is utilising these ongoing advances. Adapting and leveraging these changes will be critical to the ANAO continuing to meet its purpose, providing opportunities for the organisation to use data analytics to strengthen audit outcomes and present data in a more accessible way to the Parliament.

Process

3.26 Core to the Data Analytics Strategy is capability building. In 2018, ANAO was primarily focused on establishing its data analytics capabilities to explore possibilities and try new approaches. Through a number of pilot projects, the ANAO has been successful in capability building and proving concepts that can be embedded in the ANAO’s audit methodologies.

3.27 In 2019, the focus has shifted to embedding data analytics to support financial statements audits and performance audits, including:

• Obtaining assurance with reduced efforts through data analytics solutions;
• Gaining a higher level of understanding and target testing based on population data;
• Automating processes with significant manual activities; and
• Developing solutions that are transferable across audits.

3.28 In applying a data analytics approach, the ANAO adopts work practices to ensure the best outcomes can be achieved for the individual audit, the Office as a whole and the entity being audited.

3.29 Below are a number of case studies from the 2018–19 financial statements audit program where data analytics has been used to enhance the audit outcome.

Case study 1: Provide assurance over entity’s revenue

3.30 The ANAO used a data analytics approach to confirm the accuracy of an entity’s revenue. This approach was taken because the complexity of the systems involved made a controls approach less effective and the quantum of data involved and complexity of business rules made sampling and manual testing time consuming and impractical.

3.31 The data analytics approach was designed for re-execution with minimal manual intervention. The ANAO’s re-calculation provided assurance over the data integrity and accuracy of the revenue being reported in the financial statements.

Case study 2: Provide assurance over payroll completeness and accuracy

3.32 The ANAO used a data analytics approach to audit an entity’s payroll expenses. This approach was taken because a controls approach was not practical due to weaknesses in the underlying control environment, and using data analytics was more efficient than manually testing the balances.

3.33 The ANAO obtained three years of HR data from the entity and developed a substantive analytical model to recalculate the payroll expenses. The ANAO’s re-calculation of payroll expenses provided assurance over completeness and accuracy reported in the financial statements.

Case study 3: A shift to population data to inform the 2018–19 audit planning

The ANAO developed a series of dashboards for an audit team to inform its 2018–19 audit planning over the purchases and payables processes. Population data on expenses were obtained from the entity and used to build a series of interactive dashboards for the audit team. These dashboards allowed the auditors to use filters and visualisations to quickly assess the risks. This work has embedded data analytics capabilities into the audit process and auditors can gain a higher level understanding based on population data. Audit teams have access to a tool that enables them to perform data-driven audit planning to build better entity understanding and identify risk areas for expenses. A standard and efficient data acquisition process has been set up between the ANAO and this entity to collect the updated data to refresh the dashboard reporting.

Future plan

3.34 The ANAO will:

• extend the existing data analytics solutions to an increasing number of audits;
• continue to develop high value data analytics solutions that are scalable, repeatable and transferable; and
• streamline and standardise data acquisition processes with entities.

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 and Sea Corporation).

Note b: The North Queensland Livestock Industry Recovery Agency (NQLIRA) was established on 2 March 2019. NQLIRA is classified as a material entity for inclusion in the consolidated financial statements. For the purposes of this report NQLIRA has not been included in the Prime Minister and Cabinet portfolio chapter due its limited financial transactions in the 2018–19 financial year. An audit report was issued for NQLIRA in 2018–19.

Introduction

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 its 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 2018–19 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 2019 and relevant to the financial management or administration of entities will inform the ANAO’s 2019–20 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 2018–19 Consolidated Financial Statements (CFS).

Figure 4.0.1: Portfolio’s contribution as a percentage of the Australian Government’s 2018–19 Consolidated Financial Statements

 

 

Source: ANAO analysis of 2018–19 CFS.

4.0.5 This chapter reflects portfolio arrangements at 30 June 2019 as established by the May 2019 Administrative Arrangements Order and outlines the following information for each portfolio:

• an overview including:
  • an analysis of income, expenses, assets and liabilities contributed to the 2018–19 CFS; and
  • a table of the number of audit differences reported to entities in the portfolio;
• for each material entity within the portfolio:
  • the primary role of the entity;
  • a summary of financial performance that provides a comparison of the 2017–18 and 2018–19 key financial statement items and commentary regarding significant movements;
  • key areas of financial statements risk including those areas identified as key audit matters (KAM)⁷⁶; and
• the status of significant and moderate audit findings reported during 2018–19 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 2019 and 30 June 2018 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 two exceptions relating to: the significant audit finding reported to the Department of Home Affairs; and the moderate audit findings reported to the Department of Education which were not agreed. Table 4.0.1 does not include significant legislative breaches. Three significant legislative breaches were reported in relation to the Northern Land Council (paragraphs 4.15.28 – 4.15.31 and 4.15.38 – 4.15.43) and Wreck Bay Aboriginal Community Council (paragraphs 4.15.45 – 4.15.48).

Table 4.1.1: 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: 2018–19 and 2017–18 ANAO correspondence.

4.1 Agriculture portfolio

Portfolio overview

4.1.1 The Agriculture portfolio supports Australia’s agricultural, fisheries, food, forestry and water resources industries. The portfolio is also responsible for Australia’s animal and plant health status to maintain overseas markets and protect the economy and environment from the impact of exotic pests and diseases.

4.1.2 The Department of Agriculture is the lead entity in the portfolio, and is responsible for developing and implementing policies and programs on agricultural, fisheries, food and forestry industries; sustaining water resources; and managing biosecurity and imported food risk.

4.1.3 Figure 4.1.1 shows the Agriculture portfolio’s income, expenses, assets and liabilities.

Figure 4.1.1: Agriculture portfolio’s income, expenses assets and liabilities

 

 

Source: 2018–19 CFS.

4.1.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.15 – 2.16. The analysis included a summary of the total number of audit differences reported to entities during the 2018–19 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Agriculture portfolio.

Table 4.1.1: The number of audit differences for entities in the Agriculture portfolio

Source: Audit differences reported to entities in the Agriculture Portfolio.

4.1.5 The following section provides a summary of the 2018–19 financial statements audit results for the Department of Agriculture.

Department of Agriculture

4.1.6 The Department of Agriculture (Agriculture) supports: the sustainability, profitability and competitiveness of Australia’s agricultural, fisheries, food and forestry industries; and the sustainable and productive management and use of rivers and water resources.

Summary of financial performance

4.1.7 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by Agriculture, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.2: Key departmental financial statements items

Source: Agriculture’s audited financial statements for the year ended 30 June 2019.

4.1.8 The net cost of services primarily increased due to higher employee expenses relating to the movement in the government bond rate used to discount employee provisions, and higher expenditure on contractors and rent. This was partially offset by an increase in own-source revenue and a reduction in grants expense. Own-source revenue increased due to higher than anticipated revenues from regulatory charging on import and export functions. The decrease in grants expense related to the Regional Investment Corporation, which was funded through an administered appropriation in 2018–19, compared to being funded through grants in 2017–18.

4.1.9 Total assets increased primarily due to an increase in internally developed intangibles for software projects which were completed during 2018–19. Total liabilities increased due to the movement in the government bond rate used to discount employee provisions.

Table 4.1.3: Key administered financial statements items

Source: Agriculture’s audited financial statements for the year ended 30 June 2019.

4.1.10 Total expenses increased primarily due to additional farm household allowances paid to farm businesses affected by worsening drought conditions, and an increase in the value of water acquired under the Murray-Darling Basin Agreement. This was partially offset by a reduction in grants expense relating to a delay in the roll out of the Murray-Darling Basin water infrastructure program.

4.1.11 The increase in total expenses relates to payments for water infrastructure projects. This results in a corresponding increase in total income where water recoveries are returned to the Commonwealth as an asset received free of charge.

4.1.12 Other comprehensive income and assets increased due to increases in the net assets of investments held in corporate Commonwealth entities within the Agriculture portfolio. In addition, total assets increased due to lower than expected payments out of the Water for the Environment special account. Cash is appropriated through the special account for water acquisitions under the Murray-Darling Basin Agreement.

4.1.13 Total liabilities increased due to higher levy payments and loans committed, but not paid, as at 30 June 2019.

Key areas of financial statements risk

4.1.14 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Agriculture’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.1.4, including areas which 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 4.1.4: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and Agriculture’s audited financial statements for the year ended 30 June 2019.

Audit results

4.1.15 The following table summarises the status of audit findings reported by the ANAO in 2017–18 and 2018–19.

Table 4.1.5: Status of audit findings

Note a: The moderate audit findings were first reported to Parliament in Auditor-General Report No. 46 of 2018–19 Interim Report on Key Financial Controls of Major Entities.

Note b: The moderate audit finding relating to the monitoring and management of privileged user access was downgraded to a minor audit finding.

Source: ANAO 2018–19 audit results

4.1.16 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Agriculture’s 2018–19 financial statements were not materially misstated.

Resolved moderate audit finding

Monitoring and management of privileged user access

4.1.17 The ANAO raised a moderate audit finding during the 2018–19 interim audit phase relating to weaknesses in the IT security control environment, including:

• a large number of active privileged user accounts and no formal monitoring controls over those accounts;
• a large number of privileged user accounts which had not been actively used during the financial year;
• a number of generic and superseded privileged user accounts which were still active. The Information Security Manual (ISM) requires that entities must restrict privileged access to unique and identifiable users; and
• three user accounts had passwords set to never expire which does not align with the ISM password management requirements.

4.1.18 During the final audit phase, the ANAO undertook additional testing and confirmed:

• a significant reduction in the number of privileged user accounts which have not been actively used during the financial year;
• the generic and superseded privileged user accounts had been disabled; and
• the three user accounts without password expiry identified had passwords configured in accordance with ISM requirements.

4.1.19 The ANAO identified that there remained findings relating to the logging and monitoring of privileged user access which Agriculture is continuing to address. As a result of the progress observed by the ANAO, this finding has been downgraded to a minor finding.

Unresolved moderate audit finding

Weaknesses in change management controls

4.1.20 During the 2018–19 interim audit phase the ANAO identified a number of weaknesses in change management controls, including:

• instances where there was no documented evidence demonstrating system changes had been tested in the production environment;
• no evidence of controls around configuration management. Configuration management controls are important as they help ensure that that only approved and tested versions of software are implemented into the production environment;
• no evidence that a change migrated from the test environment to the production environment was performed by different users; and
• an increase to the percentage of changes implemented by the department using the emergency change procedures.

4.1.21 During the final phase of the audit, the ANAO noted that Agriculture had not fully implemented the ANAO recommendations. Progress in addressing this issue will be reviewed during the 2019–20 financial statements audit.

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 family law and marriage; administrative and international law; protective security; privacy, and freedom of information; personal property securities; and native title. It also includes integrity oversight, international crime cooperation, criminal law policy, and support for Royal Commissions.

4.2.2 As a result of Administrative Arrangements Order (AAO) changes announced on 29 May 2019, the portfolio now includes additional responsibility for the industrial relations system, including work health and safety, rehabilitation and compensation which were previously from included in the portfolio of the Department of Employment, Skills, Small and Family Business (Employment), formerly the Department of Jobs and Small Business.

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’s income, expenses, assets and liabilities

 

 

Source: 2018–19 CFS.

4.2.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.15 – 2.16. The analysis included a summary of the total number of audit differences reported to entities during the 2018–19 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Attorney-General’s portfolio.

Table 4.2.1: The number of audit differences for entities in the Attorney-General’s portfolio

Source: Audit differences reported to entities in the Attorney General’s Portfolio.

4.2.5 The following sections provide a summary of the 2018–19 financial statements audit results for the AGD, other material entities and findings related to non-material entities in the portfolio.

Attorney-General’s Department

4.2.6 The Attorney-General’s Department (AGD) supports the Attorney-General in achieving a just and secure society through the maintenance and improvement of Australia’s law, justice, security and integrity frameworks.

4.2.7 As a result of AAO changes announced on 29 May 2019, AGD gained responsibility for a number of industrial relations and work health and safety functions from the Department of Employment, Skills, Small and Family Business (Employment), formerly the Department of Jobs and Small Business.

Summary of financial performance

4.2.8 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by AGD, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.2: Key departmental financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2019.

4.2.9 The decrease in net cost of services was principally due to a transfer of staff resulting in a decrease in employee benefit expenses of $21.4 million. Staff transferred to the Department of Home Affairs and the Australian Signals Directorate (ASD) as a result of the transfer of the national and cyber security functions under the December 2017 AAO. Expenses and revenues from both government and external sources also decreased as a result of the transferred functions. There was also a transfer of net assets resulting from the AAO.

Table 4.2.3: Key administered financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2019.

4.2.10 The reduction in total expenses was mainly due to the completion of a number of Royal Commissions during the year resulting in lower employee benefits and associated expenses relating to accommodation, advertising, general office and ICT support and maintenance costs.

4.2.11 The increase in total assets principally relates to the recognition of the Commonwealth’s investment in corporate entities in the portfolio, totalling $347.0 million following the transfer of the industrial relations functions under the May 2019 AAO. In addition, following this May 2019 AAO, amounts owing by debtors relating to the various industrial relations entities have been recognised by AGD including the Long Service Leave Coal industry collection levies for payment to the Coal Mining Industry (Long Service Leave Funding) Corporation and the Fair Entitlements Guarantee (FEG) levies, and the personal benefit recoveries under the FEG scheme.

4.2.12 The increase in total liabilities is mainly due to the recognition following the May 2019 AAO of the amount payable to Comcare by the Commonwealth for worker’s compensation claims and management of asbestos related personal injury common law claims against the Commonwealth.

Key areas of financial statements risk

4.2.13 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of AGD’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.2.4. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.4: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and AGD’s audited financial statements for the year ended 30 June 2019.

Audit results

4.2.14 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

Coal Mining Industry (Long Service Leave Funding) Corporation

4.2.15 The Coal Mining Industry (Long Service Leave Funding) Corporation (Coal LSL) collects levies from employers to fund long service leave payments made to employees in the Australian black coal mining industry. The levies collected are invested until the employee takes long service leave, at which point the employer makes a payment to the employee and seeks reimbursement from Coal LSL in accordance with legislative arrangements.

4.2.16 As a result of the AAO on 29 May 2019, Coal LSL transferred from Employment to the Attorney-General’s portfolio.

Summary of financial performance

4.2.17 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by Coal LSL, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.5: Key financial statements items

Source: Coal LSL’s audited financial statements for the year ended 30 June 2019.

4.2.18 The increase in net cost of services is largely a result of the increase in the provision for long service leave reimbursements to meet Coal LSL’s obligations to fund the long service leave of workers in the black coal industry. The value of this provision is determined using an actuarial method and is sensitive to changes in government bond rates, which are used to discount the provision.

4.2.19 Total assets increased due to a gain in the value of unit trust investments held by Coal LSL. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.2.20 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 Coal LSL’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.2.6. 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 2018–19 audit results, and Coal LSL’s audited financial statements for the year ended 30 June 2019.

Audit results

4.2.21 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

Comcare

4.2.22 Comcare is responsible for the administration of an integrated safety, rehabilitation and compensation scheme for federal employers, employees and their representatives. Comcare aims to support participation and productivity nationally, through healthy and safe workplaces that minimise harm in the workplace. This also includes the management of a comprehensive workers compensation liability scheme and the Commonwealth common law liabilities for asbestos compensation.

4.2.23 As a result of the AAO on 29 May 2019, Comcare transferred from Employment to the Attorney-General’s portfolio.

Summary of financial performance

4.2.24 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by Comcare, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.7: Key financial statements items

Note a: Comcare has had a prior year adjustment and Table 4.2.7 has been adjusted to reflect the changes.

Source: Comcare’s audited financial statements for the year ended 30 June 2019.

4.2.25 The decrease in the net contribution by services was largely due to decreases of $220.2 million in the movement of the workers’ compensation claims provision and common law asbestos-related disease claims provision. The decrease in workers’ compensation claims provision is $107.8 million, largely due to the lower volume of claims. There were fewer actual workers’ compensation claims than projected at the previous valuation for incapacity and medical payments. The increase in the common law asbestos-related disease claims provision is $26.1 million. The primary driver of the increase is the changes in economic assumptions including inflation and discount rates impacting, on the actuarial valuation.

4.2.26 Comcare has arrangements for special appropriations funding for claims to be returned to the Commonwealth when it is surplus to Comcare’s requirements, after third party recoveries. This is reflected in the decrease in the return of surplus claims funding above.

4.2.27 The reduction in assets was primarily due to a reduction in non-current appropriation receivable in relation to the reduction in the premium claims provision.

4.2.28 The reduction in total liabilities was mainly due to a decrease in the workers’ compensation claims provision as a result of the current year valuation. The decreases in long-term continuance rates and changes to projections in actual incapacity and medical claims are the main drivers.

Key areas of financial statements risk

4.2.29 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Comcare’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.2.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.8: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and Comcare’s audited financial statements for the year ended 30 June 2019.

Audit results

4.2.30 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

High Court of Australia

4.2.31 The High Court of Australia (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

4.2.32 The following section provides a comparison of the 2017–18 and 2018–19 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 4.2.9: Key departmental financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2019.

4.2.33 The increase in total assets is attributable to the $7.6 million upward revaluation of the High Court building and higher term deposits held at the end of 2018–19. The increase in the fair value of the building is reflected in other comprehensive income. Term deposits held at the end of 2018–19 predominately relate to funding for capital projects that are at the procurement or design stage. These projects are expected to be completed during 2019–20.

Table 4.2.10: Key administered financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2019.

4.2.34 The High Court’s administered income relates to the Court’s hearing and filing fees. The hearing and filing fees remained relatively stable between 2017–18 and 2018–19, reflecting normal business activities.

Key areas of financial statements risk

4.2.35 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 High Court’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.2.11. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.11: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and High Court’s audited financial statements for the year ended 30 June 2019.

Audit results

4.2.36 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

National Archives of Australia

4.2.37 The National Archives of Australia (the National Archives) has four main roles under the Archives Act 1983: to 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

4.2.38 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the National Archives, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.12: Key financial statements items

Source: The National Archives’ audited financial statements for the year ended 30 June 2019.

4.2.39 The decrease in other comprehensive income is attributed to the revaluation of property, plant and equipment and the re-estimation of make-good provisions in 2018–19. Total comprehensive income has also been affected by these changes resulting in a decrease. The increase in total assets is also a result of the revaluation of property, plant and equipment.

Key areas of financial statements risk

4.2.40 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 the National Archives’ financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2018–19 is provided in Table 4.2.13. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.2.13: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and the National Archives’ audited financial statements for the year ended 30 June 2019.

Audit results

4.2.41 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

Comments on non-material entities

Australian Law Reform Commission

4.2.42 The Australian Law Reform Commission (ALRC) undertakes research and provides recommendations to reform the law on topics selected by the Attorney-General of Australia.

Resolved moderate audit finding

Processing and review of general journals

4.2.43 During the 2018–19 interim audit phase the ANAO identified that all ALRC general journals were processed by one individual and were not subject to an independent review process. The ALRC’s monthly accounts were subject to informal monitoring but this was not evidenced as performed and did not involve the required level of review to ensure general journals processed were appropriate.

4.2.44 During the 2018–19 final audit phase the ALRC had implemented an appropriate review process whereby general journals were subject to an independent review that was appropriately documented. This audit finding is considered resolved.

4.3 Communications and the Arts portfolio

Portfolio overview

4.3.1 The Communications and the Arts portfolio is responsible for implementing government policy and programs with respect to digital technologies, communications services and public access to art and culture.

4.3.2 The Department of Communications and the Arts is the lead entity in the portfolio, with responsibilities including the promotion of an innovative and competitive communications 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.

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

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

 

 

Source: 2018–19 CFS.

4.3.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.15 – 2.16. The analysis included a summary of the total number of audit differences reported to entities during the 2018–19 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Communications and the Arts portfolio.

Table 4.3.1: The number of audit differences for entities in the Communications portfolio

Source: Audit differences reported to entities in the Communications Portfolio.

4.3.5 The following sections provide a summary of the 2018–19 financial statements audit results for the Department of Communications and the Arts, and other material entities.

Department of Communications and the Arts

4.3.6 The Department of Communications and the Arts (Communications) is responsible for policy development, advice and program delivery with respect to digital technologies, communications services and promoting access to, and participation in, art and culture.

Summary of financial performance

4.3.7 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by the Communications, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.2: Key departmental financial statements items

Source: Communications’ audited financial statements for the year ended 30 June 2019.

4.3.8 Net cost of services increased in 2018–19 due to a reduction in gains reported from 2017–18. Communications’ main office relocated to new premises as part of the Commonwealth’s Operation Tetris resulting in a one off net gain of $11.3 million on office fit-out being recognised during 2017–18. The fluctuations in other balances reflect normal business activities.

Table 4.3.3: Key administered financial statements items

Source: Communications’s audited financial statements for the year ended 30 June 2019.

4.3.9 The increase in income reflects the Commonwealth’s funding of the national broadband network rollout through debt rather than capital since November 2017. This led to a $282.1 million increase in interest being recognised in 2018–19. The outstanding loan balance of $13.1 billion due at 30 June 2019 is net of interest.

4.3.10 Following valuation assessments in 2018–19, the value of the Commonwealth’s investment in NBN Co Limited (NBN Co) decreased by $4.6 billion. This reduction is offset by the $7.5 billion increase in loan repayments due to the Commonwealth from NBN Co. The fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.3.11 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Communications’ financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.3.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

Table 4.3.4: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and Communications’ audited financial statements for the year ended 30 June 2019.

Audit results

4.3.12 The following table summarises the status of audit findings reported by the ANAO in 2017–18 and 2018–19.

Table 4.3.5: Status of audit findings

Source: ANAO 2018–19 audit results.

4.3.13 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that the Communications’ 2018–19 financial statements were not materially misstated.

New moderate audit finding

Documentation of significant estimates and judgements

4.3.14 During the 2017–18 financial statements audit, the ANAO observed that Communications failed to adequately document consideration and application of Australian Accounting Standards when forming significant estimates and judgements, increasing the risk of management bias and material misstatement of the Communications’ financial statements. This was reported as a minor audit finding at the conclusion of the 2017–18 financial statements audit.

4.3.15 Communications had committed to preparing accounting position papers and ensuring significant judgements and large, one-off transactions relating to the financial statements are supported by appropriate evidence and analysis. Communications initially identified 11 position papers to be prepared to support the 2018–19 financial statements. At the conclusion of the audit only seven had been provided. The remaining four will be reviewed by ANAO once provided.

4.3.16 Communications did not adequately compile documentation to support the key assumptions underpinning significant judgement and estimates on the key audit matters of the:

• NBN Co Loan measurement and implementation of AASB 9 Financial Instruments;
• valuation of NBN Co; and
• NBN Co loan assessment for commercial terms versus concessional terms upon resettlement.

4.3.17 Initial position papers provided on the above areas did not adequately address the application of the relevant accounting standards, consideration of alternative assumptions or outcomes, justification for the assumptions used and management’s basis for the ranges adopted. The completeness of papers and the untimely delivery by Communications on its documented accounting positions, increased the risk of material misstatements to the financial statements.

Unresolved moderate audit finding

Risk management practices relating to NBN Co’s loan facility

4.3.18 The Commonwealth’s loan agreement with NBN Co was renegotiated during 2018–19 and sets out the terms of the $19.5 billion facility, including the applicable undertakings, restrictions and interest rate and a requirement that the principal amount borrowed is to be fully refinanced by 30 June 2024. The value of the loan drawn down as at 30 June 2019 was $13.1 billion. The NBN Co’s operating cash flows are forecast to be positive by 2020–21.

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

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

4.3.20 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 Co, therefore the recovery of any losses may need to be absorbed by the Commonwealth.

4.3.21 Communications has taken steps to address the weaknesses identified above. The ANAO has not been able to test the operating effectiveness of these processes due to the timing of implementation, being post 30 June 2019. The issue therefore remains unresolved and the ANAO, will assess the operating effectiveness of these new controls to support Communications monitoring of NBN Co’s credit risk and exposure in terms of the loan recoverability during the 2019–20 audit.

Australian Broadcasting Corporation

4.3.22 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

4.3.23 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the ABC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.6: Key financial statements items

Source: ABC’s audited financial statements for the year ended 30 June 2019.

4.3.24 The net cost of services decreased in 2018–19, due to an insurance recovery of $43.2 million to address the cost of remedial works on the ABC’s Ultimo building. This is related to a building maintenance provision of $30.7 million recognised in 2017–18.

4.3.25 Total other comprehensive income increased in 2018–19 largely due to a revaluation of the ABC’s Ultimo premises. The valuation also increased the 2018–19 total assets. All other movements are a result of normal business activities.

Key areas of financial statements risk

4.3.26 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the ABC’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.3.7. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.7: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and ABC’s audited financial statements for the year ended 30 June 2019.

Audit results

4.3.27 The following table summarises the status of the audit finding reported by the ANAO in 2017–18 and 2018–19.

Table 4.3.8: Status of audit findings

Source: ANAO 2018–19 audit results.

New moderate audit finding

Security management

4.3.28 Maintaining and supporting IT systems requires that some user accounts, both at a network and application level, have extensive access rights (privileged access). Privileged user access can be used to circumvent security controls to make direct changes, either to system settings or systems data, or to access files and accounts used by others.

4.3.29 The ANAO identified a number of weaknesses in the effectiveness of the ABC’s management of privileged and general users and access controls, including:

• instances where network accounts which were no longer required were active;
• a lack of evidence to confirm the approval for modification of access rights for a number of users;
• instances where access to user accounts was not disabled in a timely manner and untimely review of user access; and
• non-compliance with minimum password parameters requirements of the ABC’s Information Security Plan (ISP).

4.3.30 These weaknesses increase the risk that inappropriate activity will occur, including inadvertent or unapproved changes to system controls and configurations. Weak password settings increase the risk of unauthorised access to key financial systems, with the potential to compromise the confidentiality and integrity of financial and other sensitive data and circumvent key business controls.

4.3.31 The ANAO recommended that the ABC improve the controls supporting user access, particularly in relation to privileged accounts, and consider the ISP requirements and current business practices to ensure they are aligned appropriately. As a result of the moderate audit finding, the ANAO undertook additional procedures during the final audit phase to gain reasonable assurance that the ABC’s 2018–19 financial statements were not materially misstated.

4.3.32 The ABC has advised it is undertaking action to address these weaknesses. The ANAO will assess the ABC’s remediation activities as part of the 2019–20 audit.

Australian Communications and Media Authority

4.3.33 The Australian Communications and Media Authority (ACMA) is responsible for the regulation of broadcasting, radio communications (spectrum management), telecommunications and online content.

Summary of financial performance

4.3.34 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by the ACMA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.9: Key departmental financial statements items

Source: ACMA’s audited financial statements for the year ended 30 June 2019.

4.3.35 The increase in the net cost of services was attributable to an increase in employee benefit expenses resulting from an increase in pay rises and the number of full time employees. In addition there was a change in the government bond rate which affected the calculation of leave provisions at year end. Total assets decreased predominately due to an additional year of amortisation for intangible assets during 2018–19. The fluctuations in other balances reflect normal business activities.

Table 4.3.10: Key administered financial statements items

Source: ACMA’s audited financial statements for the year ended 30 June 2019.

4.3.36 In 2017–18, total income and assets mainly related to the revenue recognised from the sale of spectrum radio communication multi-year licences. There were no spectrum sales in the 2018–19 year.

4.3.37 The decrease in liabilities is due to the unwinding of revenue received in advance from multi-year spectrum licenses which was recorded as revenue received in advance in 2017–18.

Key areas of financial statements risk

4.3.38 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 focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2018–19 is provided in Table 4.3.11. No significant or moderate audit findings were identified relating to this key area of risk.

Table 4.3.11: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and the ACMA’s audited financial statements for the year ended 30 June 2019.

Audit results

4.3.39 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

Australian Postal Corporation

4.3.40 The Australian Postal Corporation (Australia Post) is a government business enterprise responsible for operating post offices and distributing mail and parcels in Australia and internationally.

Summary of financial performance

4.3.41 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by Australia Post, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.12: Key financial statements items

Source: Australia Post’s audited financial statements for the year ended 30 June 2019.

4.3.42 Australia Post reported a decrease in total comprehensive income during 2018–19 which is reflective of increased sales of goods and services offset by a corresponding increase to employee and supplier expenses. The increase to total revenue and income is primarily driven by strong growth in domestic parcels, express services and international products ($331.1 million). This continues to be partially offset by the decline in letters and mail volumes ($183.5 million). Total expenses increased primarily due to an increase in supplier expenses and employee expenses. The increase in supplier 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 and adverse bond rate impacts on leave and other entitlements.

4.3.43 The 2018–19 income tax expense in the current period has been impacted by tax offsets from financial transactions during the period such as non-assessable gains on sale of properties and shares ($11.8 million).

4.3.44 The reduction in assets was primarily attributed to the sale of assets held for sale at 30 June 2018 ($211.4 million) partially offset by additions to property plant and equipment assets in 2018–19 ($159.6 million). The 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 Australia Post’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.3.13, including areas which 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 4.3.13: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and Australia Post’s audited financial statements for the year ended 30 June 2019.

4.3.46 The performance audit report Auditor-General Report No. 1 2019–20 Cyber Resilience of Government Business Enterprises and Corporate Commonwealth Entities was tabled during 2019–20 and was relevant to the financial management or administration of Australia Post.

4.3.47 The audit objective was to assess the effectiveness of the management of cyber security risks by Australia Post, ASC Pty Ltd and the Reserve Bank of Australia. Australia Post was found to not effectively manage cyber security risks. The ANAO recommended that Australia Post should continue to implement its cyber security improvement program and key controls across all its critical assets to enable cyber risks to be within its tolerance level. In light of the findings the ANAO increased scrutiny over the key financial systems that Australia Post relies on to prepare the financial statements. There were no additional audit findings identified.

Audit results

4.3.48 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

National Gallery of Australia

4.3.49 The National Gallery of Australia (NGA) is responsible for 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

4.3.50 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the NGA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.14: Key financial statements items

Source: NGA’s audited financial statements for the year ended 30 June 2019.

4.3.51 The increase in net cost of services is primarily attributable to an increase in employee benefits expenses and a decrease in own-source revenue. The increase in employee expenses is due to a more conservative approach to the capitalisation of staff time associated with collection management activities, resulting in a greater proportion being expensed rather than capitalised. Own-source revenue was higher in 2017–18 due to the receipt of a one off funding from the portfolio department for building repairs.

4.3.52 Revenue from government was higher in 2018–19 due to additional funding provided on an ongoing basis from 2018–19 to allow the NGA to continue to safeguard and exhibit the national collection of artworks.

Key areas of financial statements risk

4.3.53 The ANAO completed appropriate audit procedures on all material items. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.3.15. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.15: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and NGA’s audited financial statements for the year ended 30 June 2019.

Audit results

4.3.54 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

National Library of Australia

4.3.55 The National Library of Australia (the Library) is responsible for 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

4.3.56 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the Library, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.16: Key financial statements items

Source: The Library’s audited financial statements for the year ended 30 June 2019.

4.3.57 The increase in net cost is mainly attributable to additional expenditure associated with the Cook and the Pacific Exhibition to commemorate the 250th anniversary of Captain James Cook’s Pacific voyages and increase in contractor expenditure on major modernisation projects.

4.3.58 The increase in revenue is mainly due to additional appropriation funding received for the Captain James Cook exhibition. The fluctuations in other balances reflects normal business activities.

Key areas of financial statements risk

4.3.59 The ANAO completed appropriate audit procedures on all material items. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2018–19 is provided in Table 4.3.17. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.3.17: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and the Library’s audited financial statements for the year ended 30 June 2019.

Audit results

4.3.60 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

NBN Co Limited

4.3.61 The primary objective of NBN Co Limited (NBN Co) is to provide wholesale services to internet service providers. NBN Co is a government business enterprise incorporated under the Corporations Act 2001.

Summary of financial performance

4.3.62 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the NBN Co, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.18: Key financial statements items

Source: NBN Co’s audited financial statements for the year ended 30 June 2019.

4.3.63 In 2018–19, NBN Co generated revenue and income of $2.9 billion and reported a net loss of $4.9 billion, after taxation. Revenue increased as the network continues to roll out with 1.5 million premises activated during the year.

4.3.64 As at 30 June 2019, NBN Co reported total assets of $32.8 billion, an increase of $4.6 billion compared with 2017–18, primarily due to an increase of $4.5 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 Co’s access technologies across Australia.

4.3.65 As at 30 June 2019, NBN Co reported total liabilities of $25.4 billion, an increase of $9.4 billion compared with 2017–18, primarily due to the additional $7.6 billion loan draw down from the $19.5 billion loan facility with the Commonwealth Government. The remaining $1.8 billion is primarily attributable to additional finance leases entered into with telecommunication providers during the year.

4.3.66 As at 30 June 2019, the contributed equity of $29.5 billion has been offset by accumulated losses of $22.2 billion.

Key areas of financial statements risk

4.3.67 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 NBN Co’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.3.19, including areas which 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 4.3.19: Key area of financial statements risk

Source: ANAO 2018–19 audit results, and NBN Co’s audited financial statements for the year ended 30 June 2019.

Audit results

4.3.68 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

4.4 Defence portfolio

Portfolio overview

4.4.1 The Defence portfolio includes a number of entities that together are responsible for the defence of Australia and its national interests. The material entities within the Defence portfolio are the Department of Defence (Defence), the Australian Signals Directorate (ASD), the Australian War Memorial (AWM), Defence Housing Australia (DHA) and the Department of Veterans' Affairs (DVA).

4.4.2 Defence includes the Australian Defence Force and is responsible for protecting and advancing Australia's strategic interests through the promotion of security and stability, the provision of military capabilities to defend Australia and its national interests, and the provision of support for the Australian community and civilian authorities 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 liabilities

 

 

Source: 2018–19 CFS

4.4.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.15 – 2.16. The analysis included a summary of the total number of audit differences reported to entities during the 2018–19 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Defence portfolio.

Table 4.4.1: The number of audit differences for entities in the Defence portfolio

Source: Audit differences reported to entities in the Defence Portfolio.

4.4.5 The following sections provide a summary of the 2018–19 financial statements audit results for Defence and other material entities.

Department of Defence

4.4.6 Defence is responsible for protecting and advancing Australia's strategic interests through the promotion of security and stability, the provision of military capabilities to defend Australia and its national interests, and the provision of support for the Australian community and civilian authorities as directed by the government.

4.4.7 As a result of the enactment of the Intelligences Services Amendment (Establishment of the Australian Signals Directorate) Act 2018, the Australian Signals Directorate transitioned from a division within Defence to a statutory agency with effect from 1 July 2018.

Summary of financial performance

4.4.8 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by Defence and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.2: Key departmental financial statements items

Source: Defence's audited financial statements for the year ended 30 June 2019.

4.4.9 Defence receives depreciation funding each year as part of revenue from government to fund the acquisition of assets. The decreased surplus is primarily due to a reduction in appropriation revenue partially offset by reversals of previous asset write-downs.

4.4.10 Total assets increased mainly due to the acquisition of buildings and infrastructure of $1.6 billion and movements in specialist military equipment (SME). The balance of SME increased as a result of a revaluation increase of $0.9 billion and acquisitions of $8.6 billion. These increases in SME were partially offset by depreciation of $4.6 billion.

Table 4.4.3: Key administered financial statements items

Source: Defence's audited financial statements for the year ended 30 June 2019.

4.4.11 The increase in total expenses is mainly attributed to an increase in defined employee benefits, primarily as a result of a $1.1 billion increase in the cost of Australian Defence Force members' service and a $0.3 billion increase in net interest costs.

4.4.12 The increase in the liability relating to these defined benefits was due to:

• interest and service costs of $8.6 billion;
• movements in financial assumptions, predominately decreases in interest rates, of $47.1 billion; and
• adjustments to reflect differences between expected and actual invalidity exits, wage, CPI and pension increases of $0.6 billion.

4.4.13 The increase in the liability was partially offset by financing of benefits and employer contributions of $2.6 billion.

Key areas of financial statements risk.

4.4.14 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Defence's financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.4.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

Table 4.4.4: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and Defence's audited financial statements for the year ended 30 June 2019.

4.4.15 The following performance audits reports were tabled during 2018–19 and 2019–20 and were relevant to the financial management or administration of Defence:

• Auditor-General Report No. 2 2019–20 Defence's Administration of Travel Allowances Paid to APS Employees;
• Auditor-General Report No. 3 2019–20 Defence's Quarterly Performance Report on Acquisition and Sustainment; and
• Auditor-General Report No. 20 2018–19 2017–18 Major Projects Report.

4.4.16 These reports identified issues around the governance, risk management and quality assurances practices of Defence. Similar issues were noted in the financial statements audit and have been raised as minor findings over the monitoring and management of travel and purchase cards and the approval and documentation of assets and inventory.

Audit results

4.4.17 The following table summarises the status of audit findings reported by the ANAO in 2017–18 and 2018–19.

Table 4.4.5: Status of audit findings

Note a: The moderate audit finding — Monitoring and management of accounts with privileged access was first reported to Parliament in Auditor-General Report No. 46 of 2018–19 Interim Report on Key Financial Controls of Major Entities.

Source: ANAO 2018–19 audit results.

4.4.18 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Defence's 2018–19 financial statements were not materially misstated.

Resolved moderate audit finding

Documentation supporting the annual assessment of SME impairment indicators

4.4.19 During the 2016–17 audit, the ANAO identified weaknesses in the documentation of Defence's SME impairment assessment which is required annually under Australian Accounting Standards Board (AASB) 136 Impairment of Assets. SME is dispersed across Defence bases with the acquisition, custodian and sustainment responsibility residing with Systems Program Offices and Project Offices and other service groups. These business units advise the Defence Finance Group annually of any impairment indicators.

4.4.20 The ANAO reported weaknesses in this process including documentation provided to the Defence Finance Group by the business units did not reflect current circumstances providing limited value to the overall impairment assurance process and instances where the assessment of impairment indicators had not been completed by Defence.

4.4.21 During the 2018–19 final audit the ANAO tested Defence SME impairment assessments, and noted that Defence had assessed and documented additional impairment indicators to be considered. These assessments were reviewed by an appropriate delegate. As a result, this finding was resolved.

Unresolved significant audit finding

Management and monitoring of SME balances in ROMAN and MILIS

4.4.22 In 2017–18 the ANAO reported a number of issues with the substantiation of SME transactions in the Military Integrated Logistics Information System (MILIS) and the corresponding accounts in the financial management information system (ROMAN). Defence uses these systems to manage the acquisition and sustainment of SME assets. The issues identified included:

• delays in processing payments and receipts in ROMAN and MILIS;
• delays in validating MILIS transactions and reconciling to balances in the clearing accounts;
• payments and purchases posted to incorrect general ledger accounts and cost centres; and
• delays in transferring SME from assets under construction to the fixed asset register after confirmation of being in use by business units.

4.4.23 In 2018–19 Defence commenced remediation of this issue, by:

• matching a significant number of ROMAN and MILIS transactions and validating price differences;
• undertaking a comprehensive review of aged balances which resulted in the transfer of assets to the fixed asset register; and
• commencing training of business units to address processing issues.

4.4.24 Defence will continue in 2019–20 to refine the reconciliation processes which will include remediation of remaining aged balances, monitoring and processing of un-validated transactions and correctly classifying project and sustainment costs. The ANAO will undertake testing of these remediation activities as part of the 2019–20 audit cycle.

Unresolved moderate audit finding

Monitoring and management of accounts with privileged access

4.4.25 Maintaining and supporting IT systems requires that some individuals have privileged access rights. This level of access can be used to bypass security controls and make changes, either to system settings or directly to system data. Individuals with privileged access must be unique and identifiable, and have their activity regularly monitored to detect any unauthorised use.

4.4.26 During the 2018–19 interim audit the ANAO's review of privileged access identified:

• five accounts that were shared by up to 16 users;
• privileged users with inappropriate access that would enable them to delete database tables; and
• password parameters that did not align to the requirements of the Australian Government Information Security Manual for password management in Defence One (Defence's Human resource information management system) and the Joint Fuel Information Management System.

4.4.27 Defence has commenced resolution of the above weaknesses, including reducing many of the accounts and shared roles identified during interim. The ANAO will undertake testing of these remediation activities as part of the 2019–20 audit cycle.

Australian Signals Directorate

4.4.28 The purpose of the Australian Signals Directorate (ASD) is to defend Australia from global threats and advance Australia's national interest through the provision of foreign signals intelligence, cyber security and offensive cyber operations, as directed by government. The Australian Cyber Security Centre, a division within ASD, provides support to government and the Australian community to improve Australia's cyber resilience. Following the enactment of the Intelligences Services Amendment (Establishment of the Australian Signals Directorate) Act 2018, ASD became a prescribed agency on 1 July 2018. Prior to this date, ASD existed as a division within the Department of Defence.

4.4.29 In addition to the establishment of ASD as a prescribed agency, certain functions associated with cyber security transferred to ASD on 1 July 2018 from the Department of the Prime Minister and Cabinet, Attorney-General's Department and the Digital Transformation Agency.

Summary of financial performance

4.4.30 The following section provides analysis of 2018–19 key financial statements items reported by ASD. As ASD was established as a prescribed agency on 1 July 2018 no comparative financial information is presented.

Table 4.4.6: Key financial statements items

Source: ASD's audited financial statements for the year ended 30 June 2019.

4.4.31 The net cost of services is due to ASD being primarily funded by appropriations from government. The more significant expenses incurred and contributing to the net cost of services by ASD relate to services received from suppliers ($240.4 million) and employee expenses ($475.9 million).

4.4.32 Total assets primarily comprise $436.5 million of non-financial assets. These non-financial assets are mainly associated with the $275.5 million of property, plant and equipment, buildings and infrastructure that were transferred to ASD on 1 July 2018 from Defence and other agencies. ASD also reported, $107.8 million in prepayments for services provided by Defence that predominately relate to shared service and occupancy expenses.

4.4.33 Total liabilities are mainly related to employee leave provisions and outstanding payments to suppliers. On 1 July 2018, $63.2 million of leave provisions were transferred to ASD from Defence and other agencies which increased to $76.5 million at 30 June 2019. The increase is primarily due to the discounting of employee provisions for reporting purposes. The Commonwealth bond rate, a key input into the discounting calculation, decreased during the period, increasing the provision balance.

Key areas of financial statements risk

4.4.34 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of ASD's financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.4.7. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.4.7: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and ASD's audited financial statements for the year ended 30 June 2019.

Audit results

4.4.35 There were no significant or moderate audit findings arising from the 2018–19 financial statements audit.

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 Australian military history.

Summary of financial performance

4.4.37 The following section provides a comparison of the 2017–18 and 2018–19 key financial statements items reported by the AWM's, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.8: Key financial statements items

Source: AWM's audited financial statements for the year ended 30 June 2019.

4.4.38 The reduction in net cost of services was mainly due to the AWM ceasing to depreciate the National Collection from 1 July 2018⁷⁷ which was partially offset by the expense associated with the development of the Memorial Redevelopment Business Plan and ICT Modernisation Project. The movement in comprehensive loss relates to the change in the value of heritage and cultural assets and fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.4.39 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 AWM's financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.4.9. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.4.9: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and AWM's audited financial statements for the year ended 30 June 2019.

Audit results

4.4.40 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.

Defence Housing Australia

4.4.41 Defence Housing Australia (DHA) is responsible for providing housing and related services to members of the Australian Defence Force and their families, consistent with Defence's operational requirements. To meet these requirements, DHA is responsible for constructing, purchasing and leasing houses for Australian Defence Force personnel. Each year, DHA sells a portion of its properties through a sale and leaseback program, and those revenues are DHA's primary source of capital funding to acquire new properties.

Summary of financial performance

4.4.42 The following section provides a comparison of the 2017–18 and 2018–19 key financial statement items reported by the DHA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.10: Key financial statements items

Source: DHA's audited financial statements for the year ended 30 June 2019.

4.4.43 The decrease in revenue was attributable to:

• the decrease in the number of leases and decrease in the proceeds from sale and leaseback of properties during the year;
• the reallocation of revenue against relevant expenses including lessor management fees which were offset against rental expense and other charges offset against related expenses; and
• a reduction in revenue relating to project management fees due to the completion of major projects in the 2018–19 financial year by DHA on behalf of Defence as part of the project management services.

4.4.44 The decrease in total expenses related specifically to the offsetting of lessor management fees against the rental expenses and the reduction in rates, repairs and maintenance due to the decrease in number of leases. The decrease in the cost of inventories sold correlates to the decrease in sales.

Key areas of financial statements risk

4.4.45 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 DHA's financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.4.11.

Table 4.4.11: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and DHA's audited financial statements for the year ended 30 June 2019.

Audit results

4.4.46 The following table summarises the status of audit findings reported by the ANAO in 2017–18 and 2018–19.

Table 4.4.12: Status of audit findings

4.4.47 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that the DHA's 2018–19 financial statements were not materially misstated.

New moderate audit finding

Completeness and Accuracy of Lease Data

4.4.48 DHA engaged a contract firm to perform an assessment of the completeness and accuracy of lease data. This initial sample assessment provided in a draft report identified some anomalies in relation to leasing data quality and internal controls. The contract firm engagement also identified a number of leases that were not able to be located for the purposes of testing. Data anomalies were noted in relation to approximately 9.3 per cent of the sample tested, a number of the errors identified related to fields which do not have a financial statements impact.

4.4.49 As a result, DHA commissioned the contract firm to utilise a technology solution to perform a full review of the lease data in relation to the entire lease portfolio (circa 13,000 leases). This work had not been completed as at the date of signing of the 2018–19 financial statements. On receipt of the results of the work performed on the entire lease portfolio, management will need to corroborate any data issues identified and update the underlying dataset to adjust for any corroborated inaccuracies to enable the calculation of the impact of the first time adoption of AASB 16 Leases. Management has developed a remediation plan and is currently implementing this plan, which is expected to be concluded in the 2019–20 financial year.

Department of Veterans' Affairs

4.4.50 The Department of Veterans' Affairs (DVA) is responsible for developing and implementing programs to assist the veteran and ex-service communities. This includes granting pensions, allowances and other benefits, and providing treatment under the Veterans' Entitlements Act 1986; the administration of benefits and arrangements under the Military Rehabilitation and Compensation and the Safety, Rehabilitation and Compensation (Defence-related Claims) legislation; administering the Defence Service Homes Act 1918 and the War Graves Act 1980; and conducting commemorative programs to acknowledge the service and sacrifice of Australian servicemen and women.

Summary of financial performance

4.4.51 The following section provides a comparison of the 2017–18 and 2018–19 key departmental and administered financial statements items reported by the DVA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.13: Key departmental financial statements items

Source: DVA's audited financial statements for the year ended 30 June 2019.

4.4.52 The net cost of services has increased primarily due to increases in contractor costs during the year relating to the additional hiring of temporary staff, in particular as a result of a surge in the number of claims received in respect of the Townsville floods. This increase has been partially offset with a decrease in information technology and communications costs as the majority of former DVA IT staff have now been transferred to Services Australia to manage the IT services provided by Services Australia to DVA.

4.4.53 Total assets increased due to increases in land and buildings relating to additional expenditure on office fit-outs following the signing of the lease for the new Brisbane office. In addition, premiums and recoveries receivable increased as a result of recoveries from increased claims activities experienced by the Defence Service Homes Insurance Scheme, which forms part of DVA's financial statements.

4.4.54 Total liabilities have increased due to increases in outstanding claims provisions. Consistent with the increase in premiums and recoveries receivable discussed above, outstanding claims provisions have increased as a result of the Townsville floods.

Table 4.4.14: Key administered financial statements items

Source: DVA's audited financial statements for the year ended 30 June 2019.

4.4.55 The increase in total expenses is mainly attributed to a $10.0 billion increase in the military compensation scheme provision following an actuarial review.

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

• opening balance adjustments of $5.2 billion, increasing the 2018 actuarial valuation due to subsequent actual claims experience and associated modelling changes; and
• adjustments of $4.8 billion in the current financial year resulting from actual claims and payments made, particularly for permanent impairment outlays under the Military Rehabilitation and Compensation Act 2004 and the Safety, Rehabilitation and Compensation (Defence Related Claims) Act 1988, which increased the provision by $0.9 billion, and interest rate changes which increased the provision by $3.9 billion.

4.4.57 The opening balance adjustments represent what the liability would have been at 30 June 2018 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 2018 and 30 June 2019, offset by actual payments.

4.4.58 The increase in the provision highlights the inherent volatility and complexity associated with the determination of a reliable best estimate valuation. Similar to previous years, payments have been high in 2018–19 as a result of both increasing claims experience, and DVA reducing the 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

4.4.59 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 DVA's financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2018–19 are provided in Table 4.4.15, including the area which was considered to be a Key Audit Matter (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.4.15: Key areas of financial statements risk

Source: ANAO 2018–19 audit results, and DVA's audited financial statements for the year ended 30 June 2019.

Audit results

4.4.60 There were no significant or moderate audit findings arising from the 2017–18 or 2018–19 financial statements audits.