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 financial statements 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 2020–21 audits of the Consolidated Financial Statements (CFS) and 244 Australian Government entities. The Auditor-General Report No.40 2020–21 Interim Report on Key Financial Controls of Major Entities (ANAO Report No.40), focused on the interim results of the audits of 25 of these major entities.

Consolidated financial statements

Audit results

4. The CFS presents the whole of government and the General Government Sector financial statements. The 2020–21 CFS was signed by the Minister for Finance on 12 November 2021 and an unmodified auditor’s report was issued on 15 November 2021.

5. There were no significant or moderate audit issues identified in the audit of the CFS in 2020–21 or 2019–20.

Australian Government financial position

6. The Australian Government’s net worth deficiency increased from $679.9 billion in 2019–20 to $743.2 billion in 2020–21. Over the period 2011–12 to 2020–21, total assets have increased from $390.6 billion to $1,000.1 billion, total liabilities increased from $647.5 billion to $1,743.3 billion and net worth has decreased from a deficit of $256.9 billion to a deficit of $743.2 billion.

Financial audit results and other matters

Quality and timeliness of financial statements preparation

7. The ANAO issued 241 unmodified auditor’s reports, including the CFS, and one modified auditor’s report, as at 19 November 2021. A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting.

8. The ANAO noted a decrease in findings relating to processes supporting financial statements preparation improved delivery of draft financial statements in line with entity financial statements project plans, a decrease in the number of unadjusted audit differences and a decrease in overall total value of unadjusted audit differences reported to entities in 2020–21 compared to 2019–20.

Timeliness of financial reporting

9. The financial statements were finalised, and auditor’s reports issued for 89 per cent of entities within three months of the financial year-end. On average it took entities 41 days after the auditor’s report was issued to table their annual reports in Parliament. Eighty-four per cent of entities that are required to table an annual report in Parliament tabled prior to or on the date that the portfolio’s Senate estimates hearing commenced. Of the remaining entities, eight per cent had not tabled an annual report as at 19 November 2021.

Key audit matter reporting

10. The ANAO has applied ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report for the 25 entities included in Auditor-General Report No.40 Interim Report on Key Financial Controls of Major Entities and the CFS. In 2020–21 a total of 58 key audit matters (KAM) were included across the 25 entities and seven KAM were included in the CFS auditor’s report.

Removal of user access

11. ISM Security Control 0430 specifies that access is removed or suspended on the same day personnel no longer have a legitimate requirement for access. An assessment of the IT control environment was performed on 18 interim report entities. The assessment includes a review of Security Control 0430. The ANAO identified eight of these entities did not adequately implement Security Control 0430 which resulted in user accounts remaining active after staff no longer required the access. Five out of the eight entities had user accounts that were accessed after the date where access was no longer required.

Financial sustainability

12. 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 or refocused funding. Our analysis concluded that the financial sustainability of the majority of entities was not at risk.

Summary of audit findings

13. A total of 164 findings were reported to entities as a result of the 2020–21 financial statements audits. These comprised two significant, 21 moderate, 127 minor findings and 14 legislative findings. The highest number of findings are in the categories of:

• IT security management and user access, in particular the management of privileged users; and
• accounting and control of non-financial assets.

14. The total findings included three significant legislative breaches, one of which has remained open since 2012–13. Eight of the 14 legislative breaches related to remuneration of key management personnel.

Reporting and auditing frameworks

Changes to the Australian public sector reporting framework

15. There were no significant changes in accounting standards in 2020–21. A revised ASA 540 Auditing Accounting Estimates and Related Disclosures was issued in December 2018 and was implemented in ANAO audits of financial statements in 2020–21. The ANAO introduced new methodology templates to address the requirements.

16. The auditing of performance information is an emerging area of interest for both national and international auditing standard setters. For the ANAO, this is an area of strategic priority as it enhances accountability and transparency to the Parliament.

17. Data analytics continues to be a focus for the ANAO, and audits undertaken in 2020–21 have continued to build on previous initiatives to enhance audit quality and efficiency. In 2021, the ANAO applied four standardised data analytics solutions to audits, at least one of which was used by more than 35 audit teams.

Cost of this report

18. The cost to the ANAO of producing this report is approximately $430,000.

Background

1.1 Government accountability and transparency is supported by the preparation and audit of the Australian Government’s 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 which includes the results of all Australian Government controlled entities, as well as the GGS financial statements. The 2020–21 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 audit matters

1.4 The ANAO’s 2020–21 audit approach identified seven key areas of financial statements risk that had the potential to impact the CFS and which were considered key audit matters (KAM). In 2020–21 there is one new KAM relating to the valuation of Australian Government securities. The KAM relating to the occurrence and accuracy of JobKeeper payments and cash flow boost to support businesses, reported in 2019–20, was removed. The KAM for 2020–21 are provided below in Table 1.1.

Table 1.1: CFS key audit matters

Note a: 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 statements 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 2020–21 audit results, and the CFS for the year ended 30 June 2021.

Audit results

1.5 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits of the CFS.

Australian Government’s financial outcome

Operating result

1.6 The following key financial measures were reported for 2020–21:

• net operating balance was a deficit of $130.5 billion (compared to a deficit of $98.8 billion in 2019–20);
• operating result was a deficit of $97.9 billion (compared to a deficit of $133.7 billion in 2019–20); and
• comprehensive result (change in net worth) was a decrease in net worth of $63.4 billion (compared to a decrease of $135.4 billion in 2019–20).

1.7 The decrease in the Australian Government’s net operating balance was due to an increase in expenses of $72.3 billion (12.1 per cent), partially offset by an increase in revenue of $40.7 billion (8.1 per cent).

1.8 The increase in expenses was due to the Australian Government’s ongoing economic response to the impact of the COVID-19 pandemic. Key movements in expenses include:

• an increase of $16.2 billion for additional benefits to households in goods and services such as payments relating to the National Disability Insurance Scheme ($5.8 billion) and medical and pharmaceutical benefits ($4.2 billion);
• an increase of current grants expenses of $17.2 billion relating to payments to states and territories under national partnership arrangements and for goods and services tax (GST) distribution;
• subsidy expenses increased by $18.0 billion, reflecting an additional $25.5 billion of JobKeeper payments, partially offset by a decrease in cash flow boost to support business of $11.3 billion; and
• additional personal benefit expenses of $15.8 billion, including working age payments such as JobSeeker and support for seniors and students.

1.9 Total revenue increased by $40.7 billion primarily due to higher taxation revenue (mainly individual income and company taxation) as a result of the improved economic conditions including a stronger labour market, higher commodity prices and strong household consumption compared with the 2019–20 which was impacted by the onset of the COVID-19 pandemic.

1.10 The Australian Government remained in deficit for 2020–21. The operating result deficit improved compared to 2019–20 as a result of fair value gains of $53.7 billion, primarily attributable to collective investment vehicles and investments administered by the Future Fund (compared to fair value losses in 2019–20 of $18.8 billion). These gains were partly offset by an increase in the net write-down of assets. In 2020–21 the net write-down of assets was $12.0 billion (compared to $9.1 billion in 2019–20), reflecting additional impairment due to the impacts of the COVID-19 pandemic on small businesses.

1.11 The comprehensive result (total change in net worth) is the sum of the operating result deficit of $97.9 billion and actuarial gains on the superannuation liability of $33.5 billion. The actuarial gain reflects an increase in the Australian Government bond rate resulting in a higher discount rate being applied in the calculation of the superannuation liability.

1.12 The expenses of the Australian Government of $671.6 billion for the year ended 30 June 2021 were funded by $541.2 billion of revenue and approximately $130.4 billion net borrowings. The additional borrowings, representing 19.4 per cent of total expenses, were applied to fund expenses resulting from the various stimulus and support packages comprising payments for personal benefits, subsidy and grants expenses in response to the COVID-19 pandemic. The Australian Government’s borrowings are expected to continue to increase through the period of the forward estimates. ¹

Revenue by source

1.13 The Australian Government’s revenue for the year ended 30 June 2021 was $541.2 billion (compared to $500.5 billion for the year ended 30 June 2020). Figure 1.1 provides an analysis of revenue by source from 1 July 2016 to 30 June 2021. Each revenue source as a percentage of total revenue has remained steady with the proportion of taxation revenue decreasing slightly from 91.3 per cent in 2016–17 to 88.7 per cent in 2020–21. Sales of goods and services has increased from 4.3 per cent to 6.2 per cent during the same period. Taxation revenue including company tax, individual tax and sales taxes remains the major source of Australian Government revenue.

Figure 1.1: Australian Government revenue by source from 2016–17 to 2020–21

 

 

Note a: In 2020–21 the main sources of taxation revenue included individual tax (49.1 per cent), company tax (20.6 per cent), sales taxes (16.0 per cent), excise duty (5.1 per cent), and customs duty (3.8 per cent).

Note b: Sales of goods and services include revenue received from the provision of regulatory services, rental income, sale of electricity by Snowy Hydro Limited, postal services and the broadband network.

Source: ANAO analysis of CFS from 2016–17 to 2020–21.

Classification of expenses by the functions of Government

1.14 Figure 1.2 provides an analysis of the Australian Government’s expenses by function from 1 July 2016 to 30 June 2021. As a percentage of total expenses, each function has remained stable during this period with the exception of ‘Other economic affairs’, which increased from 2.1 per cent in 2016–17 to 12.3 per cent in 2020–21. The ‘Other economic affairs’ function had higher expenses in 2019–20 and 2020–21 due to the JobKeeper payments and cash flow boost measures administered by the Australian Taxation Office to support businesses impacted by the effects of the COVID-19 pandemic.

Figure 1.2: Proportion of expenses of Government by function from 2016–17 to 2020–21

 

 

Note a: The ‘Other purposes’ function includes payments to: agriculture, forestry and fishing; fuel and energy; housing and community amenities; mining, manufacturing and construction; public order and safety; and transport and communications.

Note b: The ‘Other economic affairs’ function represents non-standard payments including storage, tourism promotion, labour market assistance to industry and industrial relations.

Source: ANAO analysis of the CFS from 2016–17 to 2020–21.

Australian Government’s financial position

Net worth

Change in net worth from 1 July 2020 to 30 June 2021

1.15 The Australian Government’s net worth deficiency increased from $679.9 billion in 2019–20 to $743.2 billion in 2020–21. Figure 1.3 provides an analysis of the change in net worth from 1 July 2020 to 30 June 2021.

Figure 1.3: Changes in the Australian Government’s net worth from 1 July 2020 to 30 June 2021

 

 

Source: ANAO analysis of 2020–21 CFS.

1.16 Table 1.2 provides an explanation of the key contributors to the change in net worth of the Australian Government between 1 July 2020 and 30 June 2021 identified in Figure 1.3.

Table 1.2: Explanation of key changes in net worth from 1 July 2020 to 30 June 2021

Source: ANAO analysis of 2020–21 CFS.

Changes in the Australian Government’s net worth from 2011–12 to 2020–21

1.17 Figure 1.4 demonstrates the changes in the Australian Government’s total assets, total liabilities and net worth over the period 2011–12 to 2020–21. Total assets increased from $390.6 billion to $1,000.1 billion, total liabilities increased from $647.5 billion to $1,743.3 billion and net worth has decreased from a deficit of $256.9 billion to a deficit of $743.2 billion.

Figure 1.4: Australian Government’s total assets, total liabilities and net worth, from 2011–12 to 2020–21

 

 

Source: ANAO analysis of 2011–12 to 2020–21 CFS.

1.18 The primary reasons for the increase in total assets include:

• investments, loans and placements and equity investments increased from $167.2 billion in 2011–12 to in $613.5 billion in 2020–21. A major contributor to this class of assets is the Australian Government’s holding of investments in the Future Fund ($191.4 billion); and
• advances paid and receivables, such as student loans, which increased from $66.6 billion in 2011–12 to $130.8 billion in 2020–21.

1.19 The increase in total liabilities is the result of:

• government securities, from $201.3 billion in 2011–12 to $683.9 billion in 2020–21;
• deposit liabilities held, from $3.0 billion in 2011–12 to $356.0 billion in 2020–21; and
• employee liabilities, including superannuation liabilities and military compensation provision, from $253.1 billion in 2011–12 to $447.5 billion in 2020–21.

1.20 There has continued to be a steady growth in net debt as a per cent of Gross Domestic Product (GDP) since 2011–12. Figure 1.5 below illustrates the change in the indicators of the net financial position of the Australian Government since 2011–12 as a per cent of GDP.

Figure 1.5: Australian Government net debt position as a per cent of GDP, from 2011–12 to 2020–21

 

 

Source: ANAO analysis of 2020–21 commentary on the CFS.

1.21 Net interest payments were $12.9 billion in 2020–21, remaining stable compared to $13.5 billion in 2019–20, reflecting the low interest rates incurred on Government Securities as a result of global economic conditions and the impact of the COVID-19 pandemic on financial markets.³

Government securities

1.22 Government securities are primarily issued to meet the financing needs of the Australian Government. Since 2011–12 there has been continued growth in the value of Government securities issued in order to fund the operations of the Australian Government because expenses have been greater than revenue received. Figure 1.6 below illustrates the growth of Australian Government revenue and expenses over the period 2011–12 to 2020–21.

Figure 1.6: Australian Government revenue and expense for the period 2011–12 to 2020–21

 

 

Source: ANAO analysis of 2011–12 to 2020–21 CFS.

1.23 Government Securities on issue from the AOFM increased by $132.3 billion (GGS) during the period. However, as a portion of the securities issued are purchased by the RBA for monetary policy purposes, after eliminations for these related transactions, Government Securities decreased by $42.0 billion at the Australian Government level in 2020–21.

1.24 The decrease in the fair value reflects the impact of the increase in yields incurred on Government Securities. For financial reporting purposes the value of Government Securities liabilities is discounted by the yield on the security over the term of the security to settlement. As the yield on these securities increases, the present value of the liability decreases.

Superannuation liabilities and the Future Fund

1.25 The Australian Government has superannuation liabilities arising from obligations to employees for defined benefit superannuation schemes. Note 9C of the CFS provides information on the nature of these schemes. The total superannuation net liability as at 30 June 2021 for these schemes was $407.5 billion (compared to $431.1 billion as at 30 June 2020). The significant balances of the reported net liability relate to the following schemes that are closed to new members:

• Commonwealth Superannuation Scheme ($86.2 billion);
• Public Sector Superannuation Scheme ($137.4 billion);
• Military Superannuation Benefits Scheme ($131.7 billion); and
• Defence Force Retirement and Death Benefits Scheme ($45.8 billion).

1.26 The primary reason for the decrease in the liability is the increase in the discount rate used in valuing the superannuation liability between 30 June 2020 and 30 June 2021.⁴ The long-term nature of the superannuation liability means that small changes to the discount rate can have a large impact on the estimation of the value of the liability.

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

1.28 Figure 1.7 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 2020–21.

Figure 1.7: Total value of Australian Government superannuation liabilities and Future Fund investments, and the Target Asset Level, from 2011–12 to 2020–21

 

 

Source: ANAO analysis of 2020–21 CFS and the Target Asset Level Declaration issued by the designated actuary of the Future Fund on 25 June 2021.

1.29 The TAL represents the best estimate of the assets required, together with investment earnings on those assets, which would be sufficient to meet 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 1.7 reflects the present value of future unfunded superannuation benefits payments discounted using the Commonwealth bond rate, in accordance with Australian Accounting Standards.

1.30 Figure 1.7 illustrates that the 2020–21 estimate of the TAL is $207.5 billion, which is above the current Future Fund net asset balance of $191.4 billion (compared to $158.2 billion in 2019 – 20).⁵ 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. In 2017 the Australian Government announced it would delay drawdowns from the Future Fund until at least 2026–27.

Non-financial assets

1.31 Non-financial assets comprise the Australian Government’s holdings of land, buildings, plant, equipment and infrastructure, heritage and cultural assets, investment properties and intangibles. The Australian Government’s non-financial assets for the year ended 30 June 2021 was $248.0 billion ($241.8 billion for the year ended 30 June 2020). Figure 1.8 provides an analysis of non-financial assets by source from 1 July 2016 to 30 June 2021.

Figure 1.8: Australian Government assets by class from 2016–17 to 2020–21

 

 

Note a: Other comprises inventory, heritage and cultural assets, investment properties and other non-financial assets.

Source: ANAO analysis of CFS from 2016–17 to 2020–21.

1.32 During the period 2016–17 to 2020–21 there have been changes in the composition of the balance of non-financial assets, particularly in relation to specialist military equipment, other plant, equipment and infrastructure and buildings. These changes are:

• specialist military equipment declined from 33.2 per cent in 2016–17 to 30.0 per cent in 2020–21. Whilst the total proportion of the balance of total non-financial assets has decreased, the balance increased by $15.8 billion over the period reflecting capability acquisition and development and fair value changes;
• other infrastructure, plant and equipment increased from 24.0 per cent in 2016–17 to 28.0 per cent in 2020–21. The increase mainly relates to the acquisition or construction of additional infrastructure assets including broadband network infrastructure by NBN Co Limited, electricity generation assets by Snowy Hydro Limited and infrastructure projects such as the construction of the Nancy Bird Walton Western Sydney International Airport; and
• buildings increased from 15.9 per cent in 2016–17 to 19.2 per cent in 2020–21. This change was due to the implementation of Australian Accounting Standard AASB 16 Leases on 1 July 2019, for which a right-of-use asset corresponding to the discounted future cash flows for rented premises was recognised for the first time.

Australian Government loans and equity issued

Investments for policy purposes

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

1.34 Investments made for policy purposes have elements of economic and social benefits in addition to providing commercial returns to the Australian Government. 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.⁶

1.35 Two key items included in investments made for policy purposes are investments in public corporations and concessional loans. The accounting treatment of investments in public corporations and concessional loans is discussed below.

Investment in public corporations (GGS)

1.36 Investments in Australian Government controlled entities has increased. Consistent with reporting requirements, these investments do not impact net operating balance or underlying cash.

1.37 The majority of these investments are in entities that provide a positive real return to the GGS over the life of the investment and are classified as equity injections. Examples of the difference between these types of equity injections are demonstrated by:

• WSA Co Limited is constructing and operating the Nancy Bird-Walton Western Sydney International Airport. The Australian Government is providing up to $5.3 billion in equity injections to the entity to construct the airport. There is an expectation that the investment will make a positive return over the long-term following the completion of the construction and commencement of the airport operations; and
• Australian Rail Track Corporation Limited (ARTC) is undertaking the construction of the Melbourne to Brisbane Inland Rail line. The Australian Government will provide up to $14.5 billion in equity injections to the entity to construct the Inland Rail Line which will be operated in addition to the entity’s existing business units. The Australian Government makes a return on the entity’s existing operations.

1.38 The impact of the equity injections or operations of these entities is not reflected in the net operating balance unless dividends are received from the entities. The ongoing valuations of these entities are reflected in 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 GGS’ net worth but not impact on the net operating balance even if the deterioration was a predictable result of a non-commercial policy decision.

1.39 For instance, ARTC’s accounting policy for the assets constructed in relation to the Inland Rail Line is to impair the balance of expenditure to nil value on the construction of Inland Rail. This impairment is based on the judgement that ARTC does not expect the future cash flows from the operation of the Inland Rail Line to exceed the cost of construction and operation, and as a result will not make a real rate of return. At the time of making payments for each equity injection to the entity the Australian Government is aware that no returns are expected from the investment being made to fund the construction of Inland Rail. As the injection is made to an existing entity that achieves a real positive rate of return from existing operations, the injection of equity is treated as an investment. As a result, changes in value of the entity are reflected as a change in net worth, but the cost of making an investment that is not expected to maintain a real positive rate of return is not reflected in the net operating balance or underlying cash balance.

1.40 Table 1.3 shows investments made in Australian Government entities where the equity contributed is greater than $300.0 million.

Table 1.3: Australian Government entities’ contributed equity, net assets and GGS fair value

Note a: The net equity deficiency reported by NBN Co Limited is mainly due to an increase in the company’s borrowings for medium term notes and private debt during 2020–21.

Note b: Snowy Hydro Limited is currently receiving contributed equity from the Australian Government for the delivery of the Snowy 2.0 hydro-electricity generation project. The balance of contributed equity comprises $816.1 million recognised prior to the Australian Government taking full ownership of the company in July 2018. The remaining contributed equity relates to contributions by the Australian Government after the purchase date.

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

Source: ANAO analysis of entity 2020–21 financial statements and the CFS for the year ended 30 June 2021.

Concessional loans

1.41 There has been a continual growth in loans provided by the Australian 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. Figure 1.9 illustrates the growth in loans and advances paid during the period 2011–12 to 2020–21.

Figure 1.9: Australian Government loans and advances paid from 2011–12 to 2020–21

 

 

Source: ANAO analysis of 2011–12 to 2020–21 CFS.

Higher Education Loan Program

1.42 The Higher Education Loan Program (HELP) is the largest Australian Government concessional loan program and is administered by the Department of Education, Skills and Employment (DESE). HELP provides financial assistance to students through income contingent loans to remove up-front cost barriers to tertiary education.

1.43 These loans are indexed to the Consumer Price Index and repayments are linked to the ability to pay based on income thresholds. The income contingent conditions associated with these loans includes not recovering the value of loans outstanding for individuals where income does not meet an annual threshold. In these circumstances the Australian Government forgoes repayment of some loans.

1.44 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 2021 was $55.5 billion compared to the nominal value of the loans of $70.3 billion. The difference between the nominal value and the fair value includes a total of $14.8 billion that is made up of amounts not expected to be repaid and the impact of the yield curve movement based on 2020–21 actuarial assessment.⁷ This reflects the accumulated cost to the Australian Government of making the loans income contingent.

1.45 Prior to 2020–21, the Australian Government recognised the change in value of debt not expected to be repaid on HELP loans as a change in fair value. The change in fair value was recognised as an ‘other economic flow’ in the operating statement. Other economic flows include revaluations of assets 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 the net operating balance.

1.46 In preparing the 2020–21 CFS, the Australian Government amended its accounting policy in respect of the treatment of HELP and other student loans. The amended accounting policy now reports the change in value of debt not expected to be repaid as a ‘mutually agreed write down’. Mutually agreed write-downs represent transactions where both parties agree to write-off an amount owing. As a result of the change in accounting policy, the movement in the value of debt not expected to be repaid within a financial year is now recorded in the net operating balance.

Administration of concessional loans

1.47 Five Australian Government entities are established for the purpose of issuing concessional loans, in addition to the HELP loans administered by DESE. The Commonwealth entities are as follows:

• Export Finance Australia (EFA) was established in its current form as a corporate Commonwealth entity in 1991. EFA provides and manages a loan portfolio to support Australian based companies seeking to grow internationally, and overseas infrastructure development.
• AOFM was established as a non-corporate Commonwealth entity in 1999 and undertakes debt management activities including the issuance of Government securities such as Treasury Bonds and Treasury Indexed Bonds. AOFM issues, manages and administers debt.
• National Housing Financing and Investment Corporation (NHFIC) was established as a corporate Commonwealth entity on 30 June 2018. NHFIC provides finance to the community housing sector and uses EFA to provide loan management services and other administrative support. During 2020–21, NHFIC raised $805.0 million through a bond issue to fund the significant portion of the loans it issued. NHFIC reports the loan transactions in its financial statements.
• Regional Investment Corporation (RIC) was established as a corporate Commonwealth entity on 8 March 2018. The RIC administers farm business loans and engages Bendigo Bank as a third-party provider to provide loan management services. The loan balances are reported by the Department of Agriculture, Water and the Environment.
• Northern Australia Infrastructure Facility (NAIF) was established as a corporate Commonwealth entity on 1 July 2016. The primary objective of the entity is to assess infrastructure projects loans. The NAIF utilises the services of EFA to provide back office administrative support. Similar to the RIC, NAIF does not report the loan balances in its financial statements. The infrastructure project loans are reported by the Department of Industry, Science, Energy and Resources.⁸

1.48 During the financial year NHFIC, RIC and NAIF have either approved the commitment of loans, or made loan advances, as set out in Table 1.4 below. The value of loan commitments and advances made by these entities has increased during 2020–21 compared with 2019–20.

Table 1.4: Loan transactions during 2020–21

Source: ANAO analysis of data provided by entities and 2020–21 annual reports.

Definitions used in this chapter

1.49 Table 1.5 below provides a glossary of the key fiscal aggregates and other terminology used in this chapter to explain the Australian Government’s net worth and financial performance.

Table 1.5: 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/> [Accessed 27 October 2021].

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.⁹ This chapter summarises the results of the 2020–21 financial statements audits and provides commentary on specific topics which relate to the governance and administration of entities.

Summary of 2020–21 auditor’s reports

2.2 A comparison of the number and type of auditor’s reports issued by the Auditor-General and his delegates in 2019–20 and 2020–21 (as at 19 November 2021), including the CFS is summarised at Table 2.1. Additional detail relating to the financial reporting frameworks applicable to the Australian Government, and the form and content of auditor’s reports is outlined in appendices 3 and 4.

Table 2.1: Summary of auditor’s reports issued and outstanding as at 19 November 2021

Note a: Australian Human Rights Commission, ANSTO Nuclear Medicine Pty Ltd, Department of Veterans’ Affairs, Gagudju Crocodile Hotel Trust, Indigenous Land and Sea Corporation, Kakadu Tourism (GCH) Pty Ltd, Voyages Indigenous Tourism Australia Pty Ltd.

Note b: National Australia Day Council. For further details of the current year qualification, refer to Chapter 4, paragraphs 4.12.60 – 4.12.64.

Note c: The 2020–21 financial statements audit had not been finalised for the following entities: Anindilyakwa Land Council, Australian Secret Intelligence Service and Tiwi Land Council.

Note d: As at 24 November 2020, the 2019–20 financial statements audit had not been finalised for the following entities: Darwin Hotel Partnership, Gagudju Crocodile Hotel Trust; Gagudju Lodge Cooinda Trust; Ikara Wilpena Enterprises Pty Ltd; Ikara Wilpena Holdings Trust; Kakadu Tourism (GCH) Pty Ltd; Kakadu Tourism (GLC) Pty Ltd; North Australia Aboriginal Corporation; Northern Australian Aboriginal Charitable Trust; Northern Land Council; Tennant Creek Land Holding Trust; Tjapukai Aboriginal Cultural Park Partnership and Wilpena Pound Aerodrome Services Pty Ltd.

Note e: An additional Commonwealth entity existed at 30 June 2021 that was not included in the total number of financial statements audits in the table above. The Royal Australian Navy Central Canteens Board registered a new subsidiary, Win with Navy Ltd, on 13 April 2021. Under section 323D of the Corporations Act 2001, the directors of this new entity have the option of extending the initial financial year to 30 June 2022 if this extension is no longer than 18 months from the date of registration. On this basis, no financial statements were produced by Win with Navy Ltd for the year ended 30 June 2021.

Note f: The Consolidated Financial Statements was included in the total number of financial statements audits.

Source: 2019–20 and 2020–21 ANAO auditor’s 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 below 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 A59.

2.4 In assessing the effectiveness of an entity’s control environment to support 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. For information relating to the assessment of the removal of user access, refer to paragraphs 2.35 to 2.50.

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. For the majority of entities, key elements of internal control were operating effectively, providing the ANAO with reasonable assurance that the prepared financial statements were free from material misstatement.

2.6 For 11 entities, except for moderate finding/s outlined in Chapter 4, the key elements of internal control were operating effectively to support the preparation of financial statements free from material misstatement.¹⁰ ANAO identified significant findings for two entities which reduced the level of confidence and assurance that could be placed on the key elements of internal control.¹¹

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. Public sector auditors have additional responsibilities to report on compliance with law, regulation or other authority. As a result, their review of internal control may be broader and more detailed.¹²

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 the effectiveness of internal control when planning and performing the audit. Financial statements preparation is often a complex task, involving compliance with a number of requirements established by Australian accounting standards and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the FRR).

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 entities to meet legislative reporting obligations including the 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 financial statements throughout the audit process.

2.10 Each year the ANAO reports on the quality of financial statements preparation to entities. At the completion of the 2020–21 financial statements audit, the ANAO reported 8 minor findings relating to processes supporting financial statements preparation. This is a decrease from 2019–20 where 3 moderate and 10 minor findings were reported to entities.

2.11 In 2020–21, the ANAO also assessed the timeliness of financial statements preparation. 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.

2.12 Timeliness in financial statements preparation improved compared to the prior year, with delivery of financial statements in line with the agreed timeframes achieved by 72 per cent of entities (compared with 64 per cent in 2019–20). A further 13 per cent of entities delivered financial statements within one week of the agreed timeframe (compared to 25 per cent in 2019–20). The remaining 15 per cent of entities provided their financial statements on average 16 working days after the agreed timeframe (compared with 11 days in 2019–20).

2.13 The quality of financial statements preparation was assessed by considering the number and value of audit differences identified. Throughout the financial statements audit process, audit differences other than those considered trivial are communicated to entities. Entities are encouraged to adjust all audit differences.¹³

2.14 There was a decrease in the number of unadjusted audit differences in 2020–21, with 91 unadjusted audit differences reported (compared with 98 in 2019–20). Of these unadjusted differences, 50 related to material entities compared with 61 in 2019–20).¹⁴ With the exception of the National Australia Day Council, the unadjusted differences, both in aggregate and individually, did not result in a material misstatement to the financial statements of the audited entities.¹⁵

2.15 While there was a decrease in the total number of unadjusted audit differences compared to 2019–20, Table 2.2 shows that the net value impact has increased in 2020–21 for two of the five categories.

Table 2.2: Total value of unadjusted audit differences ($ million)

Source: ANAO analysis of entity closing reports.

2.16 Of the unadjusted differences identified as a result of the 2020–21 financial statements audits, a total of five adjustments relating to two entities were made at the CFS level. The two entities were the Australian Taxation Office and the Department of Defence.

2.17 The ANAO reported a decrease in findings related to processes supporting financial statements preparation, a decrease in the number of unadjusted audit differences and a decrease in overall total value of unadjusted audit differences reported to entities in 2020–21 compared to 2019–20. Noting the reductions indicate some improvements have been made, there still remains an opportunity to improve quality assurance frameworks over financial statements processes.

2.18 The ANAO recommends that entities continue to enhance their quality assurance frameworks, to ensure that significant accounting policies, estimates and adjustments underpinning financial statements are reviewed as early as possible in the preparation process. In their assurance role, audit committees are encouraged to actively support management through the critical evaluation of accounting papers and holding entities to account for delivering on agreed timetables and taking up all identified audit adjustments.

Timeliness of financial reporting

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

2.20 Figure 2.2 shows that the percentage of entities with financial statements and the associated auditor’s report signed within three months of the reporting year-end has significantly improved between 2019–20 and 2020–21. Eighty-nine per cent of financial statements were signed and associated auditor’s reports issued, within three months of year-end compared to 78 per cent in 2019–20. The ANAO issued 98 per cent of auditor’s reports within two business days of the signing of the financial statements by the accountable authority, compared with 91 per cent in 2019–20.

Figure 2.2: Timeframes for auditor’s report signing from the end of financial year

 

 

Source: ANAO data.

2.21 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 244 mandated financial statements audits, 186 are required to present annual reports to the responsible minister under the Public Governance, Performance and Accountability Act 2013.¹⁶

2.22 Annual reports are approved by the entity’s accountable authority before being provided to the minister and tabled in Parliament. The Resource Management Guides (RMG) 135 Annual report for non-corporate Commonwealth entities, and 136 Annual report for corporate Commonwealth entities state 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 RMG 137 Annual report for Commonwealth companies states that Commonwealth company directors must give the annual report to the responsible Minister the earlier of 21 days before the next annual general meeting after the end of the reporting period for the company or 4 months after the end of the reporting period for the company.

2.23 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.

Figure 2.3: Timeframe for tabling 2020–21 annual reports from issuance of auditor’s report

 

 

Source: ANAO analysis.

2.24 The analysis above shows that accountable authorities approved 55 per cent of annual reports within 10 days of the issue of the auditor’s report (compared to 58 per cent in 2019–20), with an overall average of 12 days. The average days between the accountable authority’s approval of the annual report and tabling in Parliament was 29 days (one day more than in 2019–20).

2.25 Twenty-nine per cent of annual reports were tabled within 30 calendar days from the issue of the auditor’s report (compared to 35 per cent in 2019–20). The tabling of annual reports in Parliament occurred on average 41 days after the auditor’s report was issued (one day less than compared with 2019–20). There are 12 entities that are required to table an annual report for 2020–21 which have not done so as at 19 November 2021.

2.26 Annual reports should be tabled in Parliament to allow sufficient time for review before Senate estimates hearings. The RMGs on annual reports indicate that normally annual reports are tabled on or before 31 October and it is expected annual reports are tabled prior to the October estimates hearings.

Figure 2.4: 2020–21 annual report tabling date in relation to Senate estimates hearing, as at 19 November 2021

 

 

Source: ANAO analysis.

2.27 Figure 2.4 above shows that 84 per cent of annual reports were tabled on or before the 2020–21 estimates hearing dates compared to 62 per cent in 2019–20. There were eight material entities across six portfolios which either tabled annual reports after the portfolio’s 2021–22 Senate estimates hearing (consistent with 2019–20) or had not tabled as at 19 November 2021. Table 2.3 includes further details about those entities that did not provide 2020–21 annual reports prior to Senate estimate hearings.

Table 2.3: Annual reports tabled after the portfolio’s Senate estimates hearings for material entities, as at 19 November 2021

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 2021–22 Senate budget estimates hearing.

Note c: The requirements for the tabling of the annual report for the High Court of Australia are outlined in s47(1) of the High Court of Australia Act 1979 (Cth). The High Court of Australia must, as soon as practicable after 30 June, prepare and submit to the Minister a report relating to the administration of the affairs of the High Court under section 17 during the year that ended on that 30 June, together with financial statements in respect of that year in such form as the Minister for Finance approves.

Source: ANAO analysis.

Key audit matters

2.28 ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701) has been applicable since 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 initially adopted inclusion of KAM in 2016–17 and has continued to include KAM in 2020–21 for the entities included in Auditor-General Report No. 40 Interim Report on Key Financial Controls of Major Entities (ANAO Report No.40). KAM have also been communicated for the Consolidated Financial Statements (CFS) from 2017–18.

2.29 In addition to the CFS, KAM have been reported for the following entities¹⁷:

• Australian Office of Financial Management;
• Australian Postal Corporation;
• Australian Taxation Office;
• Departments of: Agriculture, Water and the Environment; Defence; Education, Skills and Employment; Finance; Foreign Affairs and Trade; Health; Home Affairs; Industry, Science, Energy and Resources; Infrastructure, Transport, Regional Development and Communications; Parliamentary Services; Social Services; the Prime Minister and Cabinet; the Treasury; and Veterans’ Affairs;
• Future Fund Management Agency and the Board of Guardians;
• National Disability Insurance Scheme Launch Transition Agency (National Disability Insurance Agency);
• National Indigenous Australians Agency;
• NBN Co Limited;
• Reserve Bank of Australia;
• Services Australia; and
• Snowy Hydro Limited.¹⁸

2.30 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.

2.31 At the commencement of each financial statements audit, an assessment is made on the relevance of KAM for that year. In 2020–21, a total of 58 KAM were reported across 24 entities (compared with 56 KAM reported from 23 entities in 2019–20). The number of KAM per entity for 2020–21 ranged from one to five (same as for 2019–20). 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.

2.32 The majority of KAM in 2020–21 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.

2.33 Other KAM included: completeness and accuracy of expenses relating to subsidies and personal benefits, and other payments; and completeness and accuracy of revenue relating to taxation, royalty and other revenue.

2.34 Snowy Hydro Limited was included in 2020–21. Three new KAM were reported:

• valuation, existence and completeness of financial instruments - energy derivatives;
• valuation of property, plant and equipment – construction in progress; and
• valuation of allowance for doubtful debts.¹⁹

Removal of user access

2.35 The operating environment has changed significantly since the Australian Government released the Digital Transformation Strategy in 2018.²⁰ The global COVID-19 pandemic has resulted in Australians shifting towards digital services and the Australian Government shifting its workforce to remote working arrangements to support the delivery of services and outcomes.

2.36 The changes in the operating environment have expanded the boundaries of government entities’ computer networks and have increased the opportunities for malicious actors. The Australian Cyber Security Centre (ACSC) stated that cyber threats will continue to increase as technology is further utilised to support Australians, government and business activities.²¹ The persistent threats require organisations to control access to their computer networks and to reduce the risks of unauthorised access to important information.

2.37 The Protective Security Policy Framework (PSPF) and Australian Government Information Security Manual (ISM) assist organisations to use their risk management framework to protect information and systems from both internal and external threats. The PSPF governs the security of government Information Communications Technology (ICT) systems across non-corporate Commonwealth entities and the ISM provides the guidance to implementing appropriate security controls.

2.38 PSPF Policy 9 Access to Information, requires entities to control access to supporting ICT systems, networks, infrastructure, devices and applications.²² Entities must ensure access to sensitive information or resources is only provided to people with a need-to-know.

2.39 The ISM provides guidance on security controls that can assist with implementing the Policy 9 requirements, specifically preventing access to sensitive information when it is no longer required. ISM Security Control 0430 specifies that access is removed or suspended on the same day personnel no longer have a legitimate requirement for access.²³

2.40 The review of information systems and related controls is an integral part of an entity’s control environment. An assessment of the IT control environment was performed on 18 interim report entities. The assessment includes a review of Security Control 0430. The 18 entities were selected on the basis of their: contribution to the income, expenses, assets and liabilities of the 2020–21 CFS; requirement to annually report against the PSPF; and IT risk and complexity.²⁴

2.41 The ANAO’s analysis identified that eight of the 18 selected entities did not adequately implement Security Control 0430 which resulted in user accounts of staff who no longer needed access to systems still being active.

2.42 The majority of the identified eight entities did not remove access in a timely manner from key financial and business applications. Some entities did not remove access for user accounts from both their computer networks and applications, which further increases the risk of unauthorised access in entities that have also implemented a single point of authentication. A user account that has not had access appropriately removed could be compromised and used to access sensitive information within the computer network and across business applications. The user accounts concerned did not have privileged access, which can reduce the impact of external and internal threats.

2.43 One of the eight entities had over 650 user accounts that were still active. Some of the 650 user accounts still had access 150 days after the date it was required to be removed. The large number of user accounts retaining access increases the potential points where cyber adversaries can enter or attack the entities’ systems.²⁵

2.44 The user accounts identified comprised of government staff and contractors. The poor management of contractor access increases the risk of security compromise through supply chain networks. The persistent threats and focus reported by ACSC on supply chain networks gives further importance to reducing the number of user accounts required on a computer network and to remove contractor access when it is no longer required.²⁶ These results support ANAO’s focus on reviewing entities’ arrangements for administering contract obligations.²⁷

2.45 Five out of the eight entities had user accounts that were accessed after the date where access was no longer required.²⁸ The five entities did not have adequate mitigating controls to detect the unauthorised and inappropriate use of those user accounts. Mitigating controls for the five entities, such as monitoring of user activities and periodic validation of user access, were not operating effectively during 2020–21, and in some instances had not been established.

2.46 The main contributing factor to failures in removal of access was the delay in notifications of the requirement to remove the access, such as when personnel change duties, leave the organisation or a contract is ceased. The lack of clarity around the roles and responsibilities between IT and business areas has resulted in controls not being consistently performed.

2.47 This was also an issue for Shared Services entities. The lack of clarity around the roles and responsibilities between IT and business areas has resulted in controls not being consistently performed. The entities were also not monitoring whether notifications were being actioned by the Shared Services entities. This has resulted in user accounts having access to systems provided by Shared Services entities, where that access was no longer required.

2.48 The ANAO noted instances where the business processes implemented allowed user accounts to remain active and entities accepted the level of associated risk based on mitigating controls. The instances related to processing of final payroll payments or the removal of access from multiple systems, with processing delays extending the timeframes for accounts remaining active. However, the entities did not effectively implement the mitigating controls.

2.49 Entities should establish robust mitigating controls to reduce the risks associated with failures in the operation of Security Control 0430. This risk-based approach to external and internal threats can assist in reducing the impact on the application controls relied upon in the preparation and audit of financial statements.

2.50 The ANAO performed additional audit procedures to gain assurance on the information being generated by relevant financial and business applications across the eight entities. The procedures did not identify any additional exceptions that would significantly increase the risk of material misstatement within each of the eight entities’ financial statements.

Financial sustainability of material entities

2.51 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 an entity’s resourcing or functions are not sustainable.

2.52 In 2018–19, the Department of Finance established a portal for centrally capturing publicly available corporate information for all Commonwealth entities.²⁹ The portal includes tools that enable users to compare and contrast financial results across all entities through the use of the following four ratios:

• total liabilities to total assets ratio which indicates the level of ownership of the entity’s assets but can also be used to gain an understanding of the net equity of the entity;
• financial assets to total liabilities ratio which indicates the extent to which an entity’s liabilities can be covered by its financial assets;
• current ratio which indicates whether an entity’s current assets are greater than its current liabilities and indicates whether the entity is likely to be able to pay its short-term liabilities as they fall due; and
• capital turnover ratio which indicates whether an entity is replacing its assets at a sustainable rate.

2.53 The Department of Finance has not developed and communicated guidance to assist users in assessing whether the ratios indicate strong or weak financial performance in the context of the government sector.³⁰ Consistent with prior years, 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 62 material entities.³¹ These parameters are described in Table 2.4 and Table 2.5 below.

Analysis of operating results

2.54 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.

2.55 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.³² As a result, any entity in this category averaging a large deficit should be considered more closely.

2.56 The ANAO analysed the operating results of all material entities over a five-year period from 2016–17 to 2020–21. The analysis is based on reported surpluses or deficits after adjusting for unfunded expenses, where relevant, highlighting the full cost of operations.³³ Of the 62 material entities, 38 were not-for-profit and 24 were corporate or commonwealth companies or not-for-profit entities which have quasi-commercial operations or departmental functions operating on a for-profit basis.

2.57 For the purposes of this analysis, material entities are grouped into three operating result categories as part of this analysis, outlined in Table 2.4.

Table 2.4: Operating result category

2.58 Figure 2.5 illustrates the summary of average operating results for not-for-profit and for profit/quasi-commercial entities and whether they had large or small average deficits or surpluses over the five-year period.

Figure 2.5: Operating result analysis

 

 

Source: ANAO analysis of 2020–21 material entities’ operating results.

2.59 In 2020–21 there was a large average deficit recorded by 21 per cent of not-for-profit entities (compared to 27 percent in 2019–20) and 25 per cent of for-profit/quasi-commercial entities (compared to 29 percent in 2019–20). Forty-five per cent of not-for-profit entities and 71 per cent of for-profit/quasi-commercial entities recorded a large average surplus (compared with 42 per cent and 63 per cent respectively in 2019–20). Thirty-four per cent of material not-for-profit entities were classified as achieving small average deficits or surpluses and managing within their breakeven mandate (consistent with 2019–20) while four per cent of material for-profit/quasi-commercial entities were classified as achieving small deficits or surpluses (compared with 8 per cent in 2019–20).

2.60 The following discussion focuses on the common drivers for these entities’ large average surpluses and large average deficits.

Large average deficit

2.61 Six for-profit/quasi-commercial entities recorded a large average deficit during the period: Australian Naval Infrastructure Pty; Australian Rail Track Corporation; Moorebank Intermodal Company Limited; National Housing Finance and Investment Corporation; NBN Co. Limited; and WSA Co Ltd.

• Four recorded large average deficits, consistent with the previous financial years due to being in the build phase of large infrastructure projects, and/or still in the process of increasing revenue. They were: Australian Naval Infrastructure Pty Ltd; Moorebank Intermodal Company Limited; NBN Co Limited; and WSA Co Ltd.³⁴
• The Australian Rail Track Corporation large average deficit is related to the increase in impairment expenses recognised for property, plant and equipment (including rail infrastructure) assets. These expenses increased in 2018–19 and have remained consistent in 2019–20 and 2020–21 as a result of impairments recognised on the assets being constructed for the Inland Rail network and on rail infrastructure assets in the Interstate and Hunter Valley rail networks. The impairment was a result of decreases in the expected net income for these assets on which the fair value is calculated.
• The National Housing Finance and Investment Corporation large average deficit is a result of the accounting treatment for the increase in concessional loans to eligible clients to $2.1 billion in 2020–21.

2.62 The following four not-for-profit entities recorded a large average deficit during the period, primarily attributable to factors that occurred in a prior year that continue to have an effect on the five-year average to 2020–21:

• the Australian Broadcasting Corporation’s operating result in 2017–18 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 Review. This large deficit continues to skew the average results over the five-year period under review;
• the Department of Industry, Science, Energy and Resources transferred the Australian Astronomical Observatory functions to the Australian National University and Macquarie University resulting in significant asset write-offs in 2017–18;
• the Department of the Prime Minister and Cabinet is in the large average deficit category as a result of the prior year impact of AASB 16 Leases; and
• the Department of Veterans’ Affairs incurred an additional $20.8 million in contractor expenses in 2019–20 to meet the increased demand for processing veteran claims.

2.63 Three not-for-profit entities remain in the large average deficit category due to factors occurring in current and prior years. Of these entities:

• The Australian Federal Police’s large average deficit is predominantly a result of: increased operating costs including additional protective equipment and cleaning of facilities in response to the COVID-19 pandemic; operations targeted at a dedicated encrypted communications platform used exclusively by organised crime; and increased employee entitlements expenses including additional provisions made for unpaid superannuation entitlements.
• The Australian Prudential Regulation Authority’s (APRA) large average deficit is a result of increased employee benefits expenses from higher staffing levels for key operational work to expand and strengthen APRA’s regulatory functions. This work included strengthening crisis readiness capabilities and oversight of cyber-resilience in APRA-regulated institutions.
• The National Capital Authority remains in the large average deficit category due to works on the National Police Memorial, where insurance funds were received and accounted for in 2015–16 but the majority of the work was undertaken in 2017–18. Additional contributors to the large average deficit are rent relief provided in response to the COVID-19 pandemic and asset write downs across a number of years.

2.64 The National Library of Australia moved from the large average surplus to the large average deficit category in 2020–21 following a decrease of $165.9 million in the value heritage and cultural collection assets, as a result of a revised assumption used in the valuation approach due to changing conditions associated with the COVID-19 pandemic.

Large average surpluses

2.65 As illustrated in Figure 2.5, 45 per cent of material not-for-profit entities reported average surpluses of more than one per cent of total expenses over the five-year period (compared to 42 per cent in 2019–20). The following discussion focuses on the common drivers for these entities’ large average surpluses.

• Consistent with prior years the following cultural institutions are included in the large average surplus category: Australian War Memorial, National Archives of Australia and National Gallery of Australia. Factors impacting the average surplus are the receipt of goods or donations for no or nominal consideration, and bequests of cash. 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.
• The Commonwealth Scientific and Industrial Research Organisation (CSIRO) continues to recognise large surpluses due to movements in the valuation of equity investments.
• The Australian Research Council’s large average surplus is due to the timing and recognition of revenue received due to events or project milestones not aligning with the related expenditure.³⁵
• The Bureau of Meteorology continues to report a large average surplus due to prior operating results, notably additional funding received in 2019–20 to support the aviation industry. In 2020–21 the entity reported a small deficit resulting from higher employee expenses due to an increased number of staff and higher supplier costs related to computer services, technical installation and networking costs for radars.
• The primary driver of Services Australia’s large average surplus is the additional funding of $521.0 million received in 2019–20 to deliver the Government’s COVID-19 pandemic stimulus initiatives. This funding was not fully expended with the unspent amount of $175.0 million returned to Government through equity, thus not impacting the operating results of the agency.
• The significant surplus for the National Health and Medical Research Council primarily relates to decreases in expenditure due to reduced activities during the COVID-19 pandemic in 2019–20 and in 2020–21, the reversal of impairment losses recognised in prior years.
• The Department of Social Services remains in the large average surplus category largely due to the resources received free of charge in 2018–19 for Aged Care Gateway IT systems application development services work completed by the Department of Health.
• The operating result of the National Disability Insurance Agency has been impacted by activity in the earlier years of the review period. Prior to 2019–20, the transition of participants to the National Disability Insurance Scheme was slower than expected and the utilisation of funds by participants was lower than anticipated which resulted in expenses incurred being lower than budgeted. Since then, there has been a significant increase in the number of participants, an increase in their utilisation rates and a reduction in the length of time it takes for claims to be lodged.
• The Australian Nuclear Science and Technology Organisation (ANSTO) remains in the large average surplus category due to prior years’ results. In 2020–21 ANSTO recognised losses of approximately $117.7 million attributable to the remeasurement of decommissioning and nuclear waste provisions compared to gains of approximately $146.1 million in 2019–20.
• The Department of Agriculture, Water and the Environment remains in the significant surplus category in 2020–21 as a result of additional funding received that was not matched by expenditure due to operational delays.³⁶
• The Australian Office of Financial Management (AOFM) remains in the large average surplus category in 2020–21. The AOFM has received additional funding over the past two years for the implementation and management of the Australian Business Securitisation Fund and the Structured Finance Support Fund.³⁷ The associated expenditure has been lower than budgeted.
• Geoscience Australia’s operating result places them in the large average surplus category due to delays in the Satellite-Based Augmentation System program relative to the original budget for this program.³⁸ The expenses for this program have not been fully realised in the past two financial years. Geoscience Australia was first assessed as material by the Department of Finance in 2019–20. The ANAO analysis includes two years of data.

2.66 Three entities have moved from the small average surplus to large average surplus category in 2020–21.

• The Australian Securities and Investment Commission received $25.0 million more than anticipated from other Australian government entities to fund the Modernising Business Registers and Global Switch Unit Exit programs.
• The Department of Education, Skills and Employment received significant revenue from government to assist in the delivery of the COVID-19 pandemic stimulus packages including school grants, university funding, increased funding for childcare payments to families and apprenticeship scheme payments including Jobactive. Funds have not been fully expended, resulting in a significant surplus for 2020–21 and a corresponding increase in appropriations receivable on the balance sheet.
• The High Court of Australia is in the large surplus category primarily as a result of assets transferred from the Law Courts Limited in 2016–17. In 2020–21 asset revaluation increments related to buildings have also contributed to the entity recording a significant surplus over the five-year period.

Balance sheet analysis

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

2.68 The ANAO analysed the balance sheet positions of material Australian Government entities as at 30 June 2021. 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 the Department of Finance

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

2.69 Based on the measures developed by the Department of Finance, the ANAO has reviewed an entity’s ability to manage its underlying financial position. As the Department of Finance has not developed guidance to assist users in assessing whether the ratios indicate strong or weak financial performance in the context of the government sector, consistent with the prior year the ANAO has determined these parameters.

2.70 In 2019–20, as a result of the implementation of AASB 16 Leases, the ANAO revised the parameters previously applied. Whilst the net impact of AASB 16 Leases on the balance sheet was limited, as the right-of-use asset and lease liability were largely offset, both the liquidity and gearing ratios of most entities were affected. As entities are required to recognise lease liabilities on their balance sheet this resulted in entities’ liquidity ratios deteriorating due to the increase in liabilities compared to financial assets. The revised parameters for determining balance sheet categories have been applied in 2020–21 and are set out in Table 2.5.

Table 2.5: ANAO parameters for balance sheet categories

Source: ANAO balance sheet categories.

Figure 2.6: Balance sheet analysis

 

 

Source: ANAO analysis of entity balance sheets.

2.71 Fifty-eight per cent of material entities had strong balance sheets in 2020–21 with the amended parameters (compared to 53 per cent in 2019–20), while 34 percent had less strong balance sheets (compared to 42 per cent in 2019–20). The main driver for the movement to the strong balance sheet category was improvement in gearing ratios stemming from increased asset values against relatively constant liabilities balances.

2.72 The entities with weak balance sheets are predominantly those whose operations are dependent on government policy and 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. Entities with weak balance sheets in 2020–21 include:

• the Australian Taxation Office (ATO) and Department of Social Services (DSS), consistent with prior years, both continue to have weak balance sheets, largely driven by the impact of the implementation of AASB 16 Leases. The initial recognition of $1.4 billion and $576.3 million in lease liabilities by the ATO and DSS respectively resulted in a deterioration of the liquidity ratio; and
• NBN Co Limited’s balance sheet continues to be impacted by debt facilities for constructing the national broadband network.

2.73 Two entities have moved from a less strong to weak balance sheet position in 2020–21:

• The Australian Bureau of Statistics moved due to non-financial asset values reducing by $27.3 million as a result of current year depreciation and impairment adjustments.
• Geoscience Australia had a reduced appropriation receivable as a result of $40.1 million being withheld under section 51 of the PGPA Act and no longer available.

Audit findings

2.74 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 2.6.³⁹

Table 2.6: Audit findings rating scale

Source: ANAO reporting policy.

2.75 A summary of findings identified for the period ended 30 June 2021 by category is presented in Table 2.7.

Table 2.7: Audit findings by category for the period ended 30 June 2021

Source: ANAO compilation of findings.

Financial statements preparation

2.76 Financial statements are an important means of demonstrating how Commonwealth entities, both at an individual and whole-of-government level, meet their financial management responsibilities. In order to provide relevant and reliable financial information to the users, entities should prepare quality financial statements in a timely manner to support entities in meeting legislative reporting obligations including tabling of annual reports. Effective project management underpins successful financial statements preparation processes.

Figure 2.7: Financial statements preparation audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.77 There are no significant or moderate findings for financial statements preparation for 2020–21. There were eight minor findings reported in this category, six were first reported in 2020–21 and two remain unresolved from prior years. There has been a decrease in financial statements preparation findings compared to the prior year. The minor findings relate to quality review processes and preparation of key position papers.

Information Technology control environment

2.78 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.

2.79 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 2.8: IT control environment audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.80 Twelve new moderate findings were reported during 2020–21.⁴⁰ Two moderate findings remain unresolved from 2019–20.⁴¹

2.81 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. Ten of the moderate findings relate to weaknesses in user access management with six pertaining to management of terminated user access.⁴²

2.82 Users with administrative privileges, commonly referred to as privileged users, are able to make significant changes to IT systems’ configuration and operation, bypass critical security settings and access sensitive information. To reduce the risks associated with this access, the Information Security Manual requires that privileged user access be appropriately restricted and when provided, that the access is logged, regularly reviewed and monitored. There were eight minor findings reported relating to privileged user access.

2.83 Thirty-four of the forty-seven minor findings were raised in 2020–21 and thirteen were raised in prior years. Ten of the minor findings raised in prior years have been unresolved for two or more years.

2.84 IT security management continues to remain the most common area of weakness in the IT control environment, with almost 87 per cent of findings, and 100 per cent of the moderate findings, relating to this area. Sustained focus is required by entities to ensure that the risks of unauthorised changes to systems and data and unauthorised data leakage are being appropriately managed.

Compliance and quality assurance frameworks

2.85 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 free from material misstatement.

Figure 2.9: Compliance and quality assurance framework audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.86 The only new moderate finding reported during 2020–21 related to assurance over administered programs.⁴³ Six of the ten minor findings were raised in 2020–21 and four were raised in prior years. Of the four prior year minor findings, one has been unresolved for two years.

Accounting and control of non-financial assets

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

Figure 2.10: Accounting and control of non-financial asset audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.88 There was one new significant finding reported in 2020–21. It relates to the valuation of the Department of Defence’s Specialised Military Equipment (SME) using the cost attribution model.⁴⁴

2.89 One new moderate finding was reported in 2020–21. It relates to the valuation methodology regarding SME. The other moderate finding was first reported in 2019–20 to the Department of Health and relates to the recording and management of the National Medical Stockpile.⁴⁵

2.90 Fourteen of the 20 minor findings were raised in the 2020–21 period. There were six unresolved findings from prior years. The minor findings 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

2.91 Revenue and receivables include 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 2.11: Revenue, receivables and cash management findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.92 There were seven new minor findings reported in 2020–21. Two of the nine findings remain unresolved from the prior year.

2.93 Six of the open minor findings relate to controls over revenue and receivables processes. Weaknesses in this category include:

• timeliness and completeness of reconciliations; and
• processes supporting completeness and accuracy of revenue reported including assessment and implementation of AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities.

2.94 The three remaining minor findings relate to cash management controls. Cash controls are core processes expected to be in a mature state at every entity. The weaknesses in this category include:

• timeliness and completeness of reconciliations; and
• weaknesses relating to the management of credit card acquittals.

Human resource financial processes

2.95 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.

2.96 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 2.12: Human resources financial processes audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.97 There was one new moderate audit finding reported to the Australian Federal Police in 2020–21 which related to the underpayment of superannuation on certain allowances. There was an unresolved moderate finding reported in 2019–20 to the Northern Land Council related to weaknesses in the management of staff leave and controls in payroll processes.⁴⁶

2.98 Nine of the sixteen minor findings were raised in 2020–21. They related to weaknesses in the management of leave balances, commencements and terminations, payroll variances and related party reporting. Seven minor findings remain unresolved from prior years and one of these findings has been unresolved since 2015–16.

Purchases and payables management

2.99 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. These are illustrated below in Figure 2.13.

Figure 2.13: Purchases and payables management audit findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.100 There was one new moderate finding reported in 2020–21 relating to weaknesses in the governance of Australian Defence Force (ADF) health services at the Department of Defence.⁴⁷ There were no unresolved moderate findings from prior years.

2.101 Seven of the eight minor audit findings were raised in 2020–21 and one minor finding remains unresolved from prior years. Common weaknesses in this category over the four-year period between 2017–18 and 2020–21 relate to:

• 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

2.102 Other audit findings typically include items relating to the: management and implementation of service level agreements or memoranda of understanding; updating or maintaining of key governance documentation. These are illustrated below in Figure 2.14.

Figure 2.14: Other Audit Findings 2017–18 to 2020–21

 

 

Source: ANAO data.

2.103 There was one significant finding reported to the Australian Human Rights Commission in 2020–21 relating to budget and financial management processes.⁴⁸ There was one moderate audit finding reported in 2020–21 for other audit findings. This related to the review and updating of existing policy documentation for the Australian Nuclear Science and Technology Organisation.⁴⁹

2.104 Eight of the nine minor findings were raised in 2020–21 and one finding remains unresolved from the prior year. The findings in this category relate 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;
• charging of costs between departmental and administered fund sources; and
• fraud risk assessments and reporting of fraud to those charged with governance.

Legislative compliance

2.105 In accordance with ANAO policy, significant legislative breaches are reported to Parliament consistent with the reporting of significant and moderate audit findings.⁵⁰ Significant legislative breaches 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 2.15 below illustrates the significant legislative breaches between 2017–18 to 2020–21.

Figure 2.15: Significant legislative breaches 2017–18 to 2020–21⁵¹

 

 

Source: ANAO data.

2.106 There were three significant breaches reported during 2020–21.⁵² Two of the breaches were raised during the current financial year and there was one that remained unresolved from prior years. The two new significant legislative breaches related to a potential section 83 breach of the constitution by the Department of the Treasury and a payment made to a related party by the Royal Australian Navy Relief Trust Fund.

2.107 The unresolved significant breach related to the Northern Land Council’s failure to fulfil its responsibilities in relation to the requirement for funds in its royalty trust account to be distributed to traditional owners within agreed timeframes. This unresolved 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 respect of 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 distributed to traditional owners, within the agreed timeframe.

2.108 There were nine new moderate legislative breaches reported during 2020–21. Seven of the nine findings related to remuneration of Key Management Personnel (KMP). The increase in the number of breaches reported is the outcome of additional focus placed on KMP reporting as a result of prior year audit findings.

2.109 There was one breach reported relating to section 23 of the PGPA Act relating to entering arrangements and committing relevant money and one breach reported relating to monies owed by the entity to the Australian Taxation Office for repayment of JobKeeper overpayments.

2.110 There were two new minor legislative breaches reported during 2020–21. One breach related to note disclosures surrounding KMP remuneration and the other related to compliance activities undertaken for administered programs.

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 sector and not-for-profit private sector. In doing so, it takes into account standards issued by the International Public Sector Accounting Standards Board.

3.3 The Minister for Finance 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 ANAO Auditing Standards were reissued in February 2021. The main change from the ANAO Auditing Standards made in February 2018 was allowing for the Auditor-General to elect, wholly or in part, to conduct a performance audit under Division 2 of Part 4 of the Act as a compliance engagement under ASAE 3100 Compliance Engagements (ASAE 3100).

3.6 For performance audits under Division 2 of Part 4 or Division 2 of Part 7 of the Act, the ANAO Auditing Standards incorporate ASAE 3100 for audits designated as performance engagements, except paragraph 56 relating to the assurance report content. Instead, the ANAO Auditing Standards have incorporated the reporting requirements specified by the International Standard of Supreme Audit Institutions ISSAI 4000 Standard for Compliance Auditing (ISSAI 4000). These reporting requirements are consistent with the practice of the ANAO in reporting conclusions, findings and recommendations in performance audit reports.

3.7 The financial reporting and auditing frameworks that applied in 2020–21 are illustrated in Appendices 3 and 4 of this report.

Changes to the Australian public sector reporting framework

The COVID-19 pandemic

3.8 Similar to 2019–20, the ANAO’s experience with 2020–21 financial statements audits identified challenges for entities when dealing with material uncertainties arising in asset valuations and in performing physical compliance activities such as inventory stocktakes. Due to travel restrictions and lock downs, ANAO staff were restricted in their ability to physically access entities’ premises leading to the increased use of remote access to entity financial management and relevant operational systems. Remote access allowed audit teams to undertake their audit work without the need to be onsite. It is expected that this increased use of remote access will continue in the 2021–22 audit cycle in support of a more agile and flexible approach to conducting audits.

3.9 The Government’s increasing utilisation of online services in supporting the response to major events such as the COVID-19 pandemic necessitates that those charged with governance understand their information and data risks along with the need to protect critical information from malicious actors. As the IT control environment remains the category that consistently has the greatest number of financial audit findings, IT control and Commonwealth entity compliance with mandatory Australian Government cybersecurity frameworks will continue to be a particular focus of ANAO’s audit work for 2021–22.

Performance framework

3.10 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. From 2016–17 to 2018–19, the ANAO completed three performance audits covering elements of 10 individual entity performance statements.⁵³

3.11 The Independent Review into the operation of the Public Governance, Performance and Accountability Act 2013 and Rule, released September 2018, recommended the Minister for Finance, in consultation with the Joint Committee of Public Accounts and Audit (JCPAA), should request that the Auditor-General pilot assurance audits of annual performance statements to trial an appropriate methodology for these audits.

3.12 Following a request from the Minister for Finance the Auditor-General commenced a program of pilot assurance audits of annual performance statements of Commonwealth entities subject to the PGPA Act, in consultation with the JCPAA. The pilot comprised assurance audits of the 2019–20 performance statements of three entities; the Attorney-General’s Department, the Department of Social Security and the Department of Veterans’ Affairs.⁵⁴

3.13 The ANAO assurance reports for the Attorney-General’s Department and the Department of Veterans’ Affairs were provided to the Minister for Finance in December 2020 and were tabled in the Parliament in February 2021. The ANAO withdrew from the Department of Social Services pilot assurance audit as the performance criteria included in the Department’s 2019–20 Corporate Plan may not have been sufficiently relevant, reliable and complete to measure the achievement of the Department’s purposes.

3.14 Under the same request from the Minister for Finance, the pilot was continued in 2020–21, with the same three entities being subject to an audit of their performance statements for the year ended 30 June 2021. The ANAO completed audits for the Attorney-General’s Department, the Department of Social Services and the Department of Veterans’ Affairs and it is expected that assurance reports will be provided to the Minister for Finance in late 2021.

Auditing under the performance framework

3.15 Assuring performance information is an emerging area of practice in the Australian and international audit profession. While assurance standards exist for the audit of non-financial historical information, more specific guidance from standard-setters is still in development. The International Auditing and Assurance Standards Board (IAASB) has published non-authoritative guidance on Extended External Reporting (EER) Assurance in April 2021. This release was supported in Australia by the release of the AUASB Bulletin Extended External Reporting (EER) Assurance Guidance in August 2021. EER relates to various forms of reporting such as performance information, integrated reporting and other reporting by entities about matters additional to the information addressed in the financial statements.

3.16 In conducting its pilot audits of performance statements, the ANAO has applied ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ASAE 3000). The ANAO continues to refine its methodology for the conduct of these audits and to develop associated policy and guidance on the application of ASAE 3000 to the Commonwealth’s performance reporting framework. This work also considers the output from the IAASB EER assurance project.

3.17 The audit of performance statements is similar to financial statements audits in that the auditor’s overall objective is to form a view about whether the auditee’s statements accurately report on the delivery of activities by the entity. However, performance statements reporting is not based on a detailed prescriptive framework supported by standards equivalent to the Australian Accounting Standards but rather a set of general principles defined by the PGPA Act and the Public Governance, Performance and Accountability Rule 2014 (the PGPA Rule). On 25 February 2020 the Minister for Finance amended the PGPA Rule to introduce revised requirements for Corporate Plans and Performance Statements with effect from the 2020–21 performance year⁵⁵. The performance framework continues to be designed to allow for a diverse range of performance objectives, measures, and results, originating from auditee systems and processes not previously subject to the rigors of audit. This presents audit challenges, including the need for a methodology suited to supporting a consistent audit approach across entities when assessing the appropriateness and completeness of performance measures, and when forming an opinion over whether results are fairly reported.

3.18 Auditing of performance statements is a strategic priority for the ANAO because of the significant potential benefits it has to the accountability and transparency to the Parliament.

3.19 The first of these key benefits is driving quality improvements in the reporting of non-financial performance information by Commonwealth entities. As an additional layer of scrutiny over entities’ processes for developing and reporting performance information, external assurance by the ANAO would be expected to drive improvements to enhance the maturity of activities in this area. This may be achieved directly through the identification of findings and recommendations in individual audits to strengthen performance reporting practices that are subsequently implemented by auditees. It may also occur through increased auditee interest in performance reporting matters in anticipation of potential audits and in seeking to match emergent better practice in this area.

3.20 Secondly, audits of performance statements will help the sector enhance trust and credibility in the reporting of non-financial performance information. As with financial statements auditing in the public sector and the broader economy, the independent credibility provided by quality audit activity and reporting will give users of Australian Government performance information reasonable assurance of the compliance of performance information with the requirements of the performance reporting framework.

3.21 Finally, ANAO audit activity for performance statements will facilitate increased dialogue in the sector about performance information. As with financial statements and performance auditing, increased audit activity is expected to provide increased information to the sector about key challenges in the preparation and auditing of performance information. This will form the basis of ongoing dialogue between ANAO and key stakeholders such as the JCPAA, the Department of Finance, audit committees, Accountable Authorities and other Commonwealth entity senior executives.

3.22 The ANAO’s methodology for performance statements audits is subject to the ANAO’s overarching quality framework as described later in this chapter.

Auditor Reporting

3.23 Auditors share the results of completed audit work with users through the auditor’s report which includes the auditor’s opinion on the preparation and fair presentation of the financial statements. Auditor reports are intended to be broadly consistent and comparable to promote the credibility of the audit process, the understanding by users of the scope and nature of an audit and also assist users to identify unusual circumstances when they are reported.

3.24 The ANAO has now embedded its use of key audit matters (KAM) in the auditor’s report for the Commonwealth Consolidated Financial Statements (CFS) and the significant Commonwealth entities and companies. KAM includes information about the most significant matters relevant to the audit and the procedures completed to address them to support the transparency of our work.

3.25 Where appropriate, the auditor’s report on the financial statements may include an ‘emphasis of matter,’ ‘other matter’ or ‘material uncertainty related to going concern’ paragraph. A report on other legal and regulatory requirements may accompany the auditor’s report on the financial statements. The inclusion of these paragraphs does not modify the auditor’s opinion.

3.26 Most commonly, an ‘emphasis of matter’ paragraph is a tool available to auditors to highlight important information. Such a paragraph is included in the auditor’s report when the auditor considers it necessary to draw to the readers’ attention a matter presented in the financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to the users’ understanding of the financial statements.

3.27 The circumstances in which an emphasis of matter is required by the auditing standards include:

• when financial statements and the auditor’s report have been issued and a fact is discovered that leads to revised financial statements and a new auditor’s report being prepared; and
• when financial statements have been prepared in accordance with a special purpose framework, and as a result the financial statements may not be suitable for another purpose.

3.28 The auditor is also required to exercise their judgement to determine if an emphasis of matter paragraph is required in other circumstances where a matter is fundamental to the users’ understanding of the financial statements. This may include restatement of comparative information because of material prior period errors, entities whose financial statements are prepared on a non-going concern basis and circumstances where the financial statements have disclosed significant areas of judgement or uncertainty where the impact is particularly significant.

3.29 For further information about ‘other matter’ and ‘material uncertainty related to going concern’ paragraphs, refer to Appendix 2.

Changes to auditing standards

3.30 A revised ASA 540 Auditing Accounting Estimates and Related Disclosures was issued in December 2018 and applied to ANAO audits of financial statements for first time in 2020–21.

3.31 In 2020–21 the ANAO introduced revised methodology templates to address the standard requirements. To ensure that audit teams appropriately responded to the new standard requirements and methodology templates, the ANAO conducted a focused real-time Quality Assurance review on selected financial statements audits with significant estimates. The real-time review assessed the compliance with the auditing standards at the planning and final stages of the audit.

3.32 The real-time review identified a number of opportunities for improvement in relation to the application of the requirements of the revised standard, including more robust documentation around the assessment of audit risks and significant assumptions and inputs underlying the accounting estimates, as well as consideration of the oversight processes for management and those charged with governance oversight over the estimate.

3.33 A new version of ASA 315 Identifying and Assessing the Risks of Material Misstatement was issued by the AUASB in February 2020, effective for financial reporting periods commencing on or after 15 December 2021, this standard will apply to the 2021–22 audit cycle.

3.34 The revised standard responds to changes in the financial reporting environment including more complex financial reporting frameworks, technology being used to a greater extent, and entities and their governance structures becoming more complex. The standard significantly enhances the auditor’s considerations in relation to an entity’s use of information technology (IT) and its impact on the audit. This includes new definitions for ‘general IT controls’ and ‘information processing controls’. Further, the standard now explicitly recognises the use of automated tools and techniques by auditors.

3.35 In addition to other changes, the revised standard also emphasises and strengthens the documentation requirements relating to the exercise of professional scepticism by the auditor.

Changes to accounting standards

3.36 There were no significant changes to accounting standards in 2020–21 that impacted on Commonwealth entities’ financial statements. In 2021–22, a new standard AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 entities applied from 1 July 2021. The changes to disclosures are expected to be minimal for Tier 2 Commonwealth entities with the recognition and measurement requirements in other Australian Accounting Standards retained. Changes to the FRR because of the adoption of AASB 1060 are currently being considered.

Quality Assurance Framework and Reporting

ANAO Quality Assurance Framework

3.37 The quality of ANAO audit work is reliant on the strength of its independence and quality control processes. The ANAO defines audit quality as the provision of timely, accurate and relevant audits, performed independently in accordance with the Auditor-General Act, ANAO auditing standards and methodologies, which are valued by the Parliament. Delivering quality audits results in improved public sector performance through accountability and transparency.

3.38 The ANAO Quality Assurance Framework and Plan 2021–22 is published on the ANAO website and articulates the system of quality control that the ANAO has established to support the delivery of high-quality audit work and enables the Auditor-General to have confidence in the opinions and conclusions in the reports prepared for the Parliament.

3.39 The ANAO quality assurance framework complies with the requirements of Auditing Standard ASQC 1 – Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements. The AUASB has issued three revised Australian Quality Management Standards that become effective on 15 December 2022:

• ASQM 1 – Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements;
• ASQM 2 – Engagement Quality Reviews; and
• ASA 220 – Quality Management for an Audit of a Financial Report and Other Historical Information.

3.40 The revised standards introduce a quality management approach that is focused on proactively identifying and responding to risks of quality. The standards include enhanced requirements and focus on governance and leadership, monitoring and remediation. In the key deliverables set out in the ANAO Quality Assurance Framework and Plan 2021–22, the ANAO will review the ANAO Quality Assurance Framework against the requirements of ASQM 1 and ASQM 2 by December 2021. The ANAO will then make enhancements to the framework to ensure that it responds to the quality risks that arise in audits of public sector entities.

3.41 The ANAO engages the Australian Securities and Investments Commission (ASIC) to conduct an annual review of the ANAO quality assurance framework and financial statements audit files, in a similar way to the review work conducted by ASIC on external auditors in the private sector. This review provides additional external oversight and scrutiny over the ANAO quality assurance framework and ensures that it is in compliance with auditing standards. The reports from the ASIC annual review are published on the ANAO website. In 2020–21, the scope of the review completed by ASIC included a review of the policies and approvals in place regarding other services conducted by contracted firms. ASIC provided the ANAO with one good practice recommendation to ensure that the documentation regarding approvals of other services sufficiently captures the evaluation and conclusion reached.

Ethics, independence and integrity

3.42 Ethical requirements, with a focus on independence are core to the quality framework. The fundamental principles of professional ethics as set out in APES 110 Code of Ethics for Professional Accountants are integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. The ANAO maintains a continued focus on independence through the application of the ANAO Independence Policy that manages threats to independence in the conduct of the ANAO’s work. The ANAO Integrity Framework sets out the ANAO’s integrity control system, supporting our organisation’s integrity. The framework encompasses the ANAO Integrity Statement, which describes five key principles of integrity that staff at the ANAO uphold — independence, honesty, accountability, openness and courage.

Quality control and consultation processes

3.43 In the conduct of their work ANAO auditors apply a robust methodology to drive consistent quality and compliance with the ANAO Auditing Standards. The ANAO audit methodology incorporates policies regarding direction, supervision and review, consultation on significant technical and ethical issues, engagement quality control review of high-risk audits and documentation of audit evidence and work performed.

ANAO Quality Reporting

3.44 The Audit Quality Report 2020–21 demonstrates the ANAO assessment of the implementation and operating effectiveness of the elements of the ANAO Quality Assurance Framework. The report provides transparency in respect of the processes, policies, and procedures that support each element of the ANAO Quality Assurance Framework, and reports audit quality indicators measuring ANAO performance against target benchmarks. The report also includes the achievement of the quality assurance strategy and deliverables set out in the Quality Assurance Framework and Plan, including the results of internal and external quality assurance reviews.

Data Analytics 2020–21

3.45 Data analytics continues to be a focus for the ANAO, and audits undertaken in 2020–21 have continued to build on previous initiatives to enhance audit quality and efficiency. More than 80 per cent of the audits of major entities conducted in-house use data analytics as part of their financial statements audits to enhance efficiency, quality and effectiveness.

3.46 In 2021, the ANAO applied four standardised data analytics solutions to audits, at least one of which was used by more than 35 audit teams. Adopting standard procedures for common audit processes reduces duplication of effort and improves quality by simplifying review and ensuring a consistent approach. The solutions have been developed with common tests, documentation and data requirements and focus on areas that are applicable to many audits. These include:

• two analytics focused on different elements of employee entitlements;
• a tool for the risk assessment of journal entries, to enhance testing in response to fraud risk identified by audit teams; and
• a solution for the testing of appropriations, which was piloted in 2020–21.

3.47 An evaluation of the solutions is being undertaken to assess the realisation of benefits from the standardisation process. Additionally, the ANAO is undertaking strategic data-related projects to continue to respond to the changing data landscape and position audit teams for the needs of the future. These include new technology solutions that will allow:

• audited entities to securely provide the data required by audit teams more efficiently, in accordance with data quality and governance requirements; and
• audit teams to have easier access to the data and analytic results relevant to their audit.

3.48 Design work for these technology solutions is currently underway.

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/or conducting data analytics over entire populations; and
• confirming significant year end balances with third parties.

4.0.3 Where a performance audit was tabled during 2020–21 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. For audits tabled since 1 July 2021 onwards, relevant observations will inform the ANAO’s 2021–22 financial statements audit risk identification process.

4.0.4 This chapter reflects portfolio arrangements at 30 June 2021 as established by the June 2021 Administrative Arrangements Order, and outlines the following information for each portfolio:⁵⁶

• an overview including:
  • an analysis of income, expenses, assets and liabilities contributed to the 2020–21 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 2019–20 and 2020–21 key financial statement items and commentary regarding significant movements;
  • key areas of financial statements risk including those areas identified as key audit matters (KAM); ⁵⁷
• the status of significant and moderate audit findings reported during 2020–21 and previous years for all entities; and
• the result of a review of the Administrative Appeals Tribunal (AAT) members’ remuneration focusing on ‘sessional members’ in the Migration and Refugee Division.⁵⁸

4.0.5 Figure 4.0.1 below provides each portfolio’s contribution, as a percentage of the Australian Government’s 2020–21 Consolidated Financial Statements (CFS).

Figure 4.0.1: Portfolio’s contribution as a percentage of the Australian Government’s 2020–21 Consolidated Financial Statements

 

 

Source: ANAO analysis of 2020–21 CFS.

4.0.6 Table 4.0.1 below presents a summary of significant and moderate findings reported at 30 June 2021 and 30 June 2020 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.

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

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

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

Note: Legislative breaches are not included in the table above. Three significant legislative breaches were reported in 2020–21. For further details refer to individual entity contributions in this chapter for the Northern Land Council paragraphs 4.12.67 to 4.12.72, Royal Australian Navy Relief Trust Fund paragraph 4.3.97, and the Department of the Treasury paragraphs 4.14.15 to 4.14.16.

Source: ANAO correspondence 2019–20 and 2020–21.

4.1 Agriculture, Water and the Environment portfolio

Portfolio overview

4.1.1 The Agriculture, Water and the Environment portfolio is responsible for advising the government and implementing programs with respect to the environment, meteorological services, climate change adaption strategy and science, water resources, rural adjustment and drought issues, plant and animal biosecurity, Antarctica and Australia’s agricultural, fisheries, food and forestry industries. Table 4.1.1 identifies material and other entities specifically mentioned in this chapter.

Table 4.1.1: Agriculture, Water and the Environment portfolio material and other entities discussed in this chapter

4.1.2 Figure 4.1.1 below shows the Agriculture, Water and the Environment portfolio income, expenses, assets and liabilities.

Figure 4.1.1:  Agriculture, Water and the Environment portfolio income, expenses, assets and liabilities

 

 

Source: ANAO analysis of 2020–21 CFS.

4.1.3 As previously outlined in Chapter 2, paragraph 2.7, analysis of the quality and timeliness of financial statements preparation included a summary of the total number of audit differences reported to entities during the 2020–21 financial statements audit. Table 4.1.2 provides a summary of those audit differences that relate to entities within the Agriculture, Water and the Environment portfolio.

Table 4.1.2: The number of audit differences for entities in the Agriculture, Water and the Environment portfolio

Source: ANAO analysis of audit differences reported to entities in the DAWE Portfolio.

4.1.4 The following section provides a summary of the 2020–21 financial statements audit results for the Department of Agriculture, Water and the Environment, and findings for other material entities and non-material entities in the portfolio.

Department of Agriculture, Water and the Environment

4.1.5 The Department of Agriculture, Water and the Environment (DAWE) is responsible for conserving, protecting and sustainably managing Australia’s biodiversity, ecosystems, environment and heritage; advancing Australia’s interests in the Antarctic region; developing and implementing policies and programs to promote more sustainable, productive, internationally competitive and profitable Australian agricultural, food and fibre industries; safeguarding Australia’s animal and plant health status; and implementing water reforms to improve the health of rivers and freshwater ecosystems and water use efficiency.

Summary of financial performance

4.1.6 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by DAWE (as outlined in Table 4.1.3 and Table 4.1.4) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.3: Key departmental financial statements items

Source: DAWE’s audited financial statements for the year ended 30 June 2021.

4.1.7 In 2020–21 there was an increase in total comprehensive income attributable to the Australian Government. The main drivers for the increase included:

• an increase of $147.6 million in Revenue from Government with a portion remaining unspent at year-end;
• the remeasurement of the Antarctic restoration provision due to changes in economic assumptions, resulting in a gain of $43.1 million compared to the prior year expense of $18.7 million and other comprehensive income of $66.2 million compared to a comprehensive loss of $17.9 million in the prior year; and
• other comprehensive income of $72.9 million, attributable to the current year valuation of assets primarily in the Antarctic.

4.1.8 Total assets increased by $212.6 million primarily due to an increase in appropriation receivables. During 2020–21 DAWE received additional appropriation funding due to budget measures and part of this additional funding remained unspent as at 30 June 2021. The underspend was due to a combination of operational delays in the Antarctic program and delays in engaging external service providers to support activities for other departmental outcomes and capital projects.

4.1.9 Total liabilities decreased by $112.0 million primarily due to a reduction in the Antarctic restoration provision. The decrease in the provision reflects updated economic assumptions compared to the prior year including more favourable interest rates, lower assumptions about cost escalation factors such as Consumer Price Index and Wage Price Index and an increase in the assumptions relating to long-term discount rate. The decrease in the provision is recognised as other gains and as a change in the asset revaluation reserve.

Table 4.1.4: Key administered financial statements items

Source: DAWE’s audited financial statements for the year ended 30 June 2021.

4.1.10 The increase in total expenses is primarily due to a higher concessional loan discount expense as a result of increased loan advances at below-market interest rates to Farm Businesses and Farm-Related Small Businesses. The average concessional discount applied to each loan also increased, due to the two-year interest free period offered on a significant number of new loans settled during 2020–21.

4.1.11 Total income has reduced overall as a result of the following offsetting movements:

• an increase in levies and charges revenue of $66.7 million, reflecting strong agricultural production and environmental factors such as increased rainfall, particularly for wheat, grains and seeds;
• new revenue of $100.0 million for the Agriculture Future Drought Resilience Special Account;
• a reduction in dividend revenue of $108.5 million. The prior year dividends were attributable to the Australian Government’s interest in Snowy Hydro Limited and were received prior to the Administrative Arrangements Order effective 1 February 2020, when the energy functions were transferred to the Department of Industry, Science, Energy and Resources; and
• a reduction in other gains of $75.0 million due to fewer water assets received for no cost compared to the prior year.

4.1.12 Total assets administered on behalf of the Government increased due to an additional $580.1 million in loan receivables and an increase of $326.5 million in cash and cash equivalents. The increase in loan receivables is in line with the higher concessional loans settled in 2020–21 compared to 2019–20. The increase in cash held in special accounts was due to:

• an increase in the balance of the Agriculture Future Drought Resilience Special Account of $100.0 million, with $58.2 million of expenditure under Future Drought Resilience programs. The delay in expenditure is driven by the Government’s decision to open the Future Drought Fund Innovation program in 2021–22 instead of 2020–21; and
• a statutory increase of $315.0 million to the Water for the Environment Special Account, with lower than budgeted expenditure of $44.2 million. The lower expenditure was attributable to the Government’s decision to end water buy backs though the Sustainable Rural Water Use and Infrastructure Program and delays by Basin states in bringing forward efficiency measures including the establishment of the off-farm efficiency programs.

Key areas of financial statements risk

4.1.13 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 DAWE’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 2020–21 are provided below in Table 4.1.5, 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 4.1.5: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and DAWE’s audited financial statements for the year ended 30 June 2021.

Audit results

4.1.14 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Bureau of Meteorology

4.1.15 The Bureau of Meteorology is responsible for gathering weather, water and atmospheric observations in order to provide forecasts, warnings and long-term weather and climatic outlooks.

Summary of financial performance

4.1.16 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by the Bureau of Meteorology (as outlined in Table 4.1.6 and Table 4.1.7) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.6: Key departmental financial statements items

Source: Bureau of Meteorology’s audited financial statements for the year ended 30 June 2021.

4.1.17 Net cost of services increased as a result of additional depreciation expenses following the capitalisation of new work in progress assets, an increase in employee costs due to employee separations and the cost of new staff, and an increase in the costs of information and communications technology (ICT) services.

4.1.18 Movements in other departmental balances were not significant.

Table 4.1.7: Key administered financial statements items

Source: Bureau of Meteorology’s audited financial statements for the year ended 30 June 2021.

4.1.19 In 2018–19 the Bureau of Meteorology ceased activities in relation to the sale of third-party advertising which was reported as administered activities. There has been no further administered activity since 2018–19 however the Bureau of Meteorology is still to resolve administered accounts payable of $366,000 relating to advertising related activities.

Key areas of financial statements risk

4.1.20 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 Bureau of Meteorology’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 2020–21 are provided in Table 4.1.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.1.8: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and Bureau of Meteorology’s audited financial statements for the year ended 30 June 2021.

Audit results

4.1.21 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Comments on non-material entities

Great Barrier Reef Marine Park Authority

4.1.22 The Great Barrier Reef Marine Park Authority (the Authority) is a non-corporate Commonwealth entity and operates as a statutory agency under the Great Barrier Reef Marine Park Act 1975. The Authority is responsible for the long-term protection of the Great Barrier Reef for all Australians and the international community through the care and development of the Marine Park.

Audit results

4.1.23 Table 4.1.9 below summarises the status of the audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.1.9: Status of audit findings

Source: ANAO 2020–21 audit results.

Resolved moderate audit finding

Expenditure control environment

4.1.24 As part of the 2019–20 financial statements audit, the ANAO tested the operational effectiveness of controls related to procurement processes and IT access. The following weaknesses were identified:

• purchase requisitions to confirm the approval of the commitment of public money did not exist in several instances;
• evidence did not exist to confirm that expenditure incurred for employment agency suppliers had been reviewed or approved by a financial delegate confirming that the services had been rendered prior to payment;
• documentation did not exist to confirm that changes to employee and supplier masterfile data are reviewed on a regular basis by an independent reviewer; and
• access rights associated with the financial institution online platform were not reviewed and the vendor payment file was not securely stored prior to uploading to the financial institution online platform.

4.1.25 In 2019–20, the Authority agreed to the ANAO’s recommendation and advised during the final phase of the audit that it had commenced remedial action to strengthen the control framework. In 2020–21, the audit team completed testing over the controls and concluded that the Authority had remediated the issues and this finding has been resolved.

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 legal services; national security and criminal law; industrial relations; work health and safety; rehabilitation and compensation; integrity and anti-corruption matters; the Commonwealth justice system, including courts, tribunals, justice policy, and legal assistance, regulation and reform; protecting and promoting human rights; government records management; and support for Commonwealth royal commissions. Table 4.2.1 identifies material and other entities specifically mentioned in this chapter.

Table 4.2.1: Attorney-General’s portfolio material and other entities discussed in this chapter

4.2.2 The Attorney-General’s Department (AGD) is the lead entity in the portfolio and is responsible for Australia’s law and justice framework and providing legal services to the Commonwealth. The department is also responsible for workplace relations and work health and safety, rehabilitation and compensation. Figure 4.2.1 below shows the Attorney-General’s portfolio income, expenses, assets and liabilities.

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

 

 

Source: ANAO analysis of 2020–21 CFS.

4.2.3 As previously outlined in Chapter 2, paragraph 2.7, analysis of the quality and timeliness of financial statements preparation included a summary of the total number of audit differences reported to entities during the 2020–21 financial statements audit. Table 4.2.2 provides a summary of those audit differences that relate to entities within the Attorney-General’s portfolio.

Table 4.2.2: 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.

4.2.4 The following sections provide a summary of the 2020–21 financial statements audit results for the AGD, other material entities and findings related to non-material entities in the portfolio.

Attorney-General’s Department

4.2.5 The Attorney-General’s Department supports the Attorney-General and Minister for Industrial Relations and the Assistant Minister to the Attorney-General and Assistant Minister for Industrial Relations. The roles of the department are to contribute towards a just and secure society by maintaining and improving Australia’s law, justice, security and integrity frameworks, and to facilitate jobs growth through policies and programs that promote fair, productive and safe workplaces.

Summary of financial performance

4.2.6 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by AGD and includes commentary regarding significant movements between years contributing to overall performance as outlined in Table 4.2.3 and 4.2.4.

Table 4.2.3: Key departmental financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2021.

4.2.7 The increase in revenue from government of $14.4 million is largely due to the provision of new measures relating to the COVID-19 pandemic Response Package of $14.5 million.

4.2.8 Total assets decreased mainly due to a reduction in land and building assets of $45.5 million. The major transaction was the transfer of fitout and right-of-use totalling $17.0 million to the Department of Home Affairs for the National Operations Centre (NOC) located in Symonston, ACT. The remaining reduction in assets related to the depreciation expense for right-of-use assets of $27.9 million and other assets of $9.8 million. These reductions have been offset by fitout acquisitions totalling $6.9 million.

4.2.9 The decrease in total liabilities of $31.7 million is principally due to the transfer of the right-of-use lease liabilities of $16.4 million relating to the transfer of the NOC to the Department of Home Affairs and the expiration of all other lease liabilities during 2020–21.

Table 4.2.4: Key administered financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2021.

4.2.10 Total expenses decreased by $184.4 million which is largely the result of the following:

• a decrease of $70.1 million in personal benefit expenses relating to payments under the Fair Entitlements Guarantee special appropriation to provide financial assistance to certain unpaid employment entitlements and is a demand driven program; and
• a decrease of $96.2 million for administered grant expenses primarily due to the Indigenous Legal Assistance Program moving to the National Legal Assistance Partnership Agreement in 2020–21.

4.2.11 Total income decreased by $105.6 million which is largely due to a $90.4 million reduction in personal benefit recoveries compared to the prior year in which a single recovery of $67.9 million occurred.

4.2.12 Total other comprehensive income increased by $323.6 million largely as the result of the gains on financial assets through comprehensive income due to an overall increase in the Commonwealth’s administered investments in associate and jointly controlled entities of $378.2 million. This was offset by a reduction in the gains on financial liabilities through comprehensive income relating to a decrease in the Commonwealth’s Comcare payables of $53.7 million.

4.2.13 The total assets increase of $185.0 million is primarily due to an increase in the Commonwealth’s investment in associate and jointly controlled entities of $199.6 million that was offset by a reduction in land and buildings of $8.8 million. Total liabilities decreased as a result of a reduction in the value of payables by the Commonwealth to Comcare for workers’ compensation claims and management of asbestos related personal injury common law claims against the Commonwealth of $44.3 million.

Key areas of financial statements risk

4.2.14 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 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 2020–21 are provided in Table 4.2.5. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.5: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and AGD’s audited financial statements for the year ended 30 June 2021.

Audit results

4.2.15 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Coal Mining Industry (Long Service Leave Funding) Corporation

4.2.16 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.

Summary of financial performance

4.2.17 The following section provides a comparison of the 2019–20 and 2020–21 key financial statements items reported by Coal LSL and includes commentary regarding significant movements between years contributing to overall performance. Table 4.2.6 outlines the key financial statements items.

Table 4.2.6: Key financial statements items

Source: Coal LSL’s audited financial statements for the year ended 30 June 2021.

4.2.18 The improved net cost of services is mainly due to an increase in the fair value of investments in unit trust arrangements. Total expenses also decreased as a result of a lower estimated long service leave provision compared to 2019–20.

4.2.19 Total assets increased primarily due to a $194.5 million increase in the fair value of unit trusts investment as global investment markets have performed strongly over the 2020–21 financial year leading to increased asset valuations.

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 2020–21 are provided in Table 4.2.7. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.7: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and Coal LSL’s audited financial statements for the year ended 30 June 2021.

Audit results

4.2.21 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Comcare

4.2.22 Comcare is the Commonwealth’s work health and safety regulator, whose stated purpose is to ‘promote and enable safe and healthy work’. It also administers the Commonwealth’s workers compensation scheme and acts as an insurer and claims manager. Comcare’s enabling role is focused on supporting engagement and better practice approaches to health and safety across its scheme.

Summary of financial performance

4.2.23 The following section provides a comparison of the 2019–20 and 2020–21 key financial statements items reported by Comcare and includes commentary regarding significant movements between years contributing to overall performance as outlined in Table 4.2.8.

Table 4.2.8: Key financial statements items

Source: Comcare’s audited financial statements for the year ended 30 June 2021.

4.2.24 The decrease in the net contribution by services was largely due to a decrease of $109.5 million attributable to changes in gains arising from the movements of workers’ compensation claims offset by an increase of $74.1 million attributable to changes in gains from the movement of asbestos-related disease claims provisions. These gains reflect changes in economic assumptions including inflation and discount rates impacting on the actuarial valuation.

4.2.25 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 increase in the available funding from movement in claims provision.

4.2.26 Total assets decreased due to a reduction of $44.3 million in appropriations receivable, and a reduction in Comcare’s cash position of $42.8 million as a result of increased expenses and reduced interest income.

4.2.27 The reduction in total liabilities was mainly due to a decrease of $90.3 million in the workers’ compensation claims provision as a result of the current year actuarial valuation.

Key areas of financial statements risk

4.2.28 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 2020–21 are provided in Table 4.2.9. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.2.9: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and Comcare’s audited financial statements for the year ended 30 June 2021.

Audit results

4.2.29 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

High Court of Australia

4.2.30 The High Court of Australia (the 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

4.2.31 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by the Court (as outlined in Table 4.2.10. and Table 4.2.11) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.10: Key financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2021.

4.2.32 The deficit attributed to the Australian Government in 2019–20 was partly due to the decrement recorded as a result of the completion of the three-yearly comprehensive valuation of the Court’s library collection. A comprehensive valuation was not commissioned in 2020–21 for the library collection.

4.2.33 The increase in other comprehensive income and total assets was a result of the annual valuation of the Court’s building.

Table 4.2.11: Key administered financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2021.

4.2.34 The Court’s administered income relates to its hearing and filing fees. The increase in administered income is due in part to an increase in hearings and an increase in hearings attracting higher fees in 2020–21.

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 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 2020–21 are provided in Table 4.2.12. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.2.12: Key area of financial statements risk

Source: ANAO 2020–21 audit results, and the High Court’s audited financial statements for the year ended 30 June 2021.

Audit results

4.2.36 Table 4.2.13 below summarises the status of the audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.2.13: Status of audit findings

Source: ANAO 2020–21 audit results.

Resolved moderate audit findings

Security management

4.2.37 Maintaining and supporting IT systems requires some user accounts, both at the network and the application level, to have extensive access rights (privileged access). During 2019–20 the ANAO identified a number of weaknesses in the effectiveness of the Court’s management of privileged users and access controls, including:

• a review of activities performed by privileged users was not performed;
• privileged accounts had internet access;
• processes were not implemented to revalidate that standard access to systems remained appropriate;
• instances where individuals were provided with privileged user access to the financial management information system (FMIS) to perform routine operations; and
• non-compliance with the Court’s password policy.

4.2.38 The Court established separate user accounts for the users of the FMIS, implemented monitoring controls in relation to the activities performed by the privileged users in the FMIS and implemented a network change to ensure compliance with the Court’s password policy.

4.2.39 At the conclusion of the 2019–20 audit, the Court advised that they would investigate the implementation of security changes that will negate the need for administrators accounts to have access to the internet. The Court also advised that management would consider the implementation of a review for activities performed by privileged users and the implementation of processes to confirm that users continue to have appropriate access to systems, applications and data in line with business requirements. This audit finding remained unresolved at the conclusion of the 2019–20 financial year.

4.2.40 In 2020–21, the Court disabled administrator’s access to the internet. The Court also implemented a detective control associated with privileged users’ activities. Monitoring activities have been implemented to confirm that users have appropriate access to system, applications and data in line with business requirements. The finding is now resolved.

Change management

4.2.41 Change management is a critical component of the information technology (IT) control environment, supporting the controlled progression of changes to IT systems. The implementation of a change management process provides management with assurance that data and calculations within systems that support decision-making and financial reporting can be relied upon. During 2019–20, the ANAO identified that processes to formally review the change management register were not implemented. The ANAO also noted that the activities of two generic user accounts to implement changes were not logged and monitored.

4.2.42 As part of the 2019–20 final audit, the Court disabled the generic user accounts. The Court advised that the change register would be reviewed on a monthly basis for appropriateness and completeness. This audit finding remained unresolved at the conclusion of 2019–20. In 2020–21, the Court implemented a review process to confirm the appropriateness and completeness of changes. The finding is now resolved.

National Archives of Australia

4.2.43 The National Archives of Australia (National Archives) is an Australian Government entity established under the Archives Act 1983. It sets information and data management policy and standards for Australian Government entities to meet in creating, retaining, maintaining, securing, preserving, appropriately disposing of, and providing appropriate access to trusted government information and data. The National Archives collects records of government decisions and actions.

Summary of financial performance

4.2.44 The following section provides a comparison of the 2019–20 and 2020–21 key financial statements items reported by the National Archives (outlined in Table 4.2.14) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.14: Key financial statements items

Source: The National Archive’s audited financial statements for the year ended 30 June 2021.

4.2.45 Net cost of services decreased due to the recognition of the intake of records increasing from $7.6 million to $13.3 million. The intake is recorded as an asset received free of charge (revenue).

4.2.46 The movement in assets and other comprehensive income is largely due to the revaluation of the heritage and cultural assets and an increase of $46.9 million in value. Movements in other balances reflect normal business activities.

Key areas of financial statements risk

4.2.47 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 2020–21 is provided in Table 4.2.15. No significant or moderate audit findings were identified relating to the key area of risk.

Table 4.2.15: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and the National Archive’s audited financial statements for the year ended 30 June 2021.

Audit results

4.2.48 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Comments on non-material entities

Australian Human Rights Commission

4.2.49 The Australian Human Rights Commission (the Commission) is Australia’s national human rights institution. Its purpose is to ensure that Australians have access to effective, independent complaint handling and public inquiry processes on human rights and discrimination matters, and benefit from human rights education, advocacy, monitoring and compliance activities.

Audit results

4.2.50 Table 4.2.16 below summarises the status of the audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.2.16: Status of audit findings

Source: ANAO 2020–21 audit results.

New significant finding

Weaknesses relating to financial management

4.2.51 The Commission has a history of operating deficits dating back to 2017–18. The continued operating deficits have resulted in the Commission’s net liability position at year-end for the last two successive years. The Commission’s net liability position as at 30 June 2021 was $5.4 million.

4.2.52 In September 2021, the Attorney-General’s Department committed to establishing a steering committee, in conjunction with the Commission and the Department of Finance, to support the development of options and implementation of strategies to transition the Commission to a sustainable financial footing by the end of 2021–22.

4.2.53 The ANAO has recommended that the Commission review the design and effectiveness of its key financial management and budgetary controls, including:

• clarifying the roles, responsibilities and accountabilities of the key personnel involved in the Commission’s budget management process;
• improving the effectiveness of the Commission’s budget management process including establishing budget reporting standards and thresholds for budget variances and commentary; and
• strengthening budget monitoring mechanisms including scheduling regular discussions on budget management variance reports, reviewing for overspending and taking appropriate corrective action where required.

Emphasis of Matter

4.2.54 The auditor’s report on the 2020–21 financial statements of the Commission includes an emphasis of matter paragraph drawing attention to the Going Concern note in the Overview section of the financial statements. The note identifies that there is material uncertainty as to whether the Commission will be able to establish a sustainable funding model and therefore whether it will be able to realise its assets and settle its liabilities in the ordinary course of business and at the amounts stated in the financial statements.

Administrative Appeals Tribunal

4.2.55 The Administrative Appeals Tribunal (AAT) conducts independent merits review of administrative decisions made by Australian Government ministers, departments and agencies and, in limited circumstances, state and territory government and non-government bodies.

Audit results

4.2.56 ANAO performed a review of AAT members’ remuneration, focusing on ‘sessional members’ in the Migration and Refugee Division (MRD) as part of the 2020–21 financial statements audit.⁵⁹

Members’ Remuneration Review

4.2.57 The ANAO found that a small number of members were paid more than the equivalent full-time salary.⁶⁰ However, the payments were within the AAT’s guidelines and procedures. The ANAO reviewed six of the highly paid members by comparing cases finalised in the Case Management System to that paid in the payroll system. In all instances, the payments were consistent with the number of cases finalised by the member.

4.2.58 The review focused on the observation that the amounts paid to sessional members could only be justified if those members had completed at least seven hours of Tribunal work a day for more than five days per week despite the fact that these members are part-time members and may have other forms of employment. The ANAO made two observations as part of the review.

Observation one: Confirmation that AAT’s guidelines and procedures align with the requirements of the Remuneration Tribunal Determination

4.2.59 The AAT advised it is currently seeking legal advice on the appropriateness of the guidelines and procedures employed by the AAT to remunerate members. The ANAO has limited its review to the AAT’s current practices and guidelines to meet the Remuneration Tribunal Determination.

4.2.60 The ANAO’s review identified some instances where members’ fortnightly paid remuneration was for more than 14 days. There was limited documentation to evidence compliance with the requirements of the Remuneration Tribunal Determination (payment for no more than seven hours per day) given that cases may be finalised over an extended period in an output based remuneration model.

4.2.61 The legal advice being sought by AAT on the interpretation of the Remuneration Tribunal Determination will give better clarity to the matter identified above.

Observation two: Weighting used in remuneration model

4.2.62 The amount paid to sessional members on case finalisation, which is based on the case weighting, may not be consistent with actual time spent. The number of case weighting days paid for the members reviewed were above those of full-time staff days available. As MRD sessional members do not keep time records the ANAO could not readily verify the validity of weightings applied. AAT advised that it would move to time spent (timesheets) rather than case finalisation basis for all divisions in December 2021 for all part-time members.

4.3 Defence portfolio

Portfolio overview

4.3.1 The Defence portfolio includes a number of entities that together are responsible for the defence of Australia and its national interests. The principal entities within the portfolio are the Department of Defence (Defence), the Department of Veterans’ Affairs (DVA), the Australian Signals Directorate and Defence Housing Australia (DHA). DVA and its associated bodies, including the Australian War Memorial (AWM), is administered separately to Defence. DVA is the primary service delivery entity with responsibility for implementing programs to assist the veteran and ex-service communities, including repatriation, rehabilitation and compensation, and war graves. Table 4.3.1 identifies material and other entities specifically mentioned in this chapter.

Table 4.3.1: Defence portfolio material and other entities discussed in this chapter

4.3.2 Defence, including the Australian Defence Force (ADF), 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. In 2020–21, support for the community and civilian authorities included support to state and territory authorities during Operation COVID-19 Assist, as well as related support provided by Defence to other parts of the Australian Public Service.

4.3.3 Figure 4.3.1 shows the Defence Portfolio’s income, expenses, assets and liabilities.

Figure 4.3.1:  Defence portfolio income, expenses, assets and liabilities

 

 

Source: 2020–21 CFS

4.3.4 As previously outlined in Chapter 2, paragraph 2.7, analysis of the quality and timeliness of financial statements preparation included a summary of the total number of audit differences reported to entities during the 2020–21 financial statements audit. Table 4.3.2 provides a summary of those audit differences that relate to entities within the Defence portfolio.

Table 4.3.2: The number of audit differences for entities in the Defence portfolio

Note a: The current year adjustments include adjustments identified in 2020–21 that relate to the prior year.

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

4.3.5 The following sections provide a summary of the 2020–21 financial statements audit results for Defence and other material entities.

Department of Defence

4.3.6 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 Australian Government.

Summary of financial performance

4.3.7 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by Defence (as outlined in Table 4.3.3 and 4.3.4) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.3: Key departmental financial statements items

Note a: Defence has restated prior year figures in the 2020–21 financial statements and Table 4.3.3 has been adjusted to reflect these changes.

Source: Defence’s audited financial statements for the year ended 30 June 2021.

4.3.8 Revenue from government decreased due to changes in Defence’s funding. Revenue from government no longer includes the cost of depreciation, inventory consumption and associated net write-downs and impairment of assets. The acquisition of new assets and inventory is fully funded via capital appropriations that are recognised in equity.

4.3.9 Total assets increased mainly due to increases in the operational and capital appropriation receivable. The capital funding receivable has increased due to the impact of the COVID-19 pandemic on international supply chains. Restrictions on the movement of workers and shutdowns in jurisdictions slowed a number of Defence projects. The operational funding receivable increased as a result of an increase in unpaid creditors as at 30 June 2021.

Table 4.3.4: Key administered financial statements items

Note a: Defence has had a prior year adjustment and Table 4.3.4 has been adjusted to reflect the changes.

Source: Defence’s audited financial statements for the year ended 30 June 2021.

4.3.10 Total liabilities administered on behalf of government represent the present value of the Australian Government’s expected future payments arising from four defined benefit superannuation plans. The liability is sensitive to movements in financial assumptions, including the interest rate and future salary and pension increases, and demographic assumptions. The demographic assumptions applied were assessed by the Australian Government Actuary as at 30 June 2020 and formed the basis of the valuation as at 30 June 2021.

4.3.11 The movement in other comprehensive income and liabilities is largely attributed to movements in the interest rate.

4.3.12 Assets administered on behalf of Government decreased as a result of the transfer of loans made to Defence Housing Australia to the Department of Finance as part of the determination made under subsection 78(1) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) to establish the DHA Borrowings Special Account 2020.

Key areas of financial statements risk.

4.3.13 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 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 2020–21 are provided in Table 4.3.5, including areas which were considered key audit matters (KAM) by the ANAO.

Table 4.3.5: Key areas of financial statements risk

Note a: A significant audit finding has been reported in respect of the cost attribution model that allocates accumulated capital costs between individual platforms assets, associated spares and inventory.

Source: ANAO 2020–21 audit results, and Defence’s audited financial statements for the year ended 30 June 2021.

4.3.14 The following performance audits reports were tabled during 2020–21 and were relevant to the financial management or administration of Defence:

• Auditor-General Report No.6 of 2020–21 Design and Implementation of the Defence Export Strategy;
• Auditor-General Report No.12 of 2020–21 Defence’s Procurement of Offshore Patrol Vessels – SEA 1190 Phase 1;
• Auditor-General Report No.18 of 2020–21 Defence’s Procurement of Combat Reconnaissance Vehicles (LAND 400 Phase 2);
• Auditor-General Report No.19 of 2020–21 2019–20 Major Projects Report;
• Auditor-General Report No.21 2020–21 Delivery of Security Vetting Services Follow-up;
• Auditor-General Report No.34 2020–21 Implementation of ANAO and Parliamentary Committee Recommendations – Department of Defence; and
• Auditor-General Report No.38 2020–21 Defence’s Implementation of Cultural Reform.

4.3.15 These reports identified issues around the procurement, governance, risk management and quality assurance practices of Defence. Similar issues were noted in the financial statements audit and have been raised as findings involving a number of key accounting and business processes.

Audit results

4.3.16 Table 4.3.6 summarises the status of audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.3.6: Status of audit findings

Note a: A moderate audit finding related to the governance of Australian Defence Force (ADF) health services was identified during the 2020–21 interim audit. A discussion of this finding can be found in the Auditor-General Report No.40 2020–21 Interim Report on Key Financial Controls of Major Entities. This finding remains unresolved.

Note b: Two moderate audit findings related to the management and monitoring of SME balances in ROMAN and MILIS and the monitoring and management of accounts with privileged access were resolved during the 2020–21 interim audit phase. A discussion of this finding can be found in the Auditor-General Report No.40 2020–21 Interim Report on Key Financial Controls of Major Entities.

Source: ANAO 2020–21 audit results.

4.3.17 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Defence’s 2020–21 financial statements were not materially misstated.

New significant audit finding

Valuation of Specialist Military Equipment using the cost attribution model

4.3.18 To support its primary outcomes, Defence undertakes a number of high value equipment acquisition projects. These projects are complex and span multiple financial years. Judgement is applied to allocate capitalised costs between individual platform assets, associated spares and inventory. As at 30 June 2021, the balance of SME assets under construction reported in the financial statements was $18.2 billion.

4.3.19 Defence uses a cost attribution model (referred to by Defence as the Asset Valuation Model) to capture costs against applicable projects for SME assets under construction. The model uses a methodology to allocate project costs across the deliverables associated with the project. The Asset Valuation Model (AVM) captures both budget and actual costs.

4.3.20 As each project is unique, the methodology and content of the AVM is specific to the individual needs of each project and varies from project to project. Decentralised project managers within Defence are responsible for determining the appropriate methodology and the allocation basis of costs within the AVM.

4.3.21 The ANAO evaluated the cost attribution model and approval of cost allocations related to SME assets under construction. The ANAO identified internal control weaknesses in the methodology used by Defence to allocate costs relating to assets under construction. These included:

• limited policies and procedures outlining the approach to developing, maintaining, and recording transactions against the cost attribution model;
• the use of excel spreadsheets to record the AVM transactions, which have no evidenced controls or protection to prevent the accidental editing or deletion of data; and
• limited quality assurance mechanisms that could be relied upon to provide assurance over the asset allocations derived from the AVMs.

4.3.22 In addition, the ANAO noted that Defence does not capture employee-related costs as part of its asset under construction projects. There are currently no systems or processes to identify the time spent by officers on specific projects.⁶¹ Analysis of project employee costs estimate this to understate asset capitalisations by $67.5 million in 2020–21.

4.3.23 Assets under construction are recorded at cost. The weaknesses noted increase the risk that the valuation of SME and the associated depreciation expense is misstated in the financial statements.

4.3.24 Additional audit procedures were performed by the ANAO to gain assurance that the SME balance and associated depreciation expense were not materially misstated.

4.3.25 The ANAO recommended that Defence:

• consider the development of an IT solution to transition project management from excel spreadsheets or consider ways to implement controls to reduce the risks associated with unintended or unauthorised changes to the spreadsheets; ⁶²
• develop guidelines, policies and procedures to assist project managers with the development, maintenance and recording of transactions associated with the cost attribution model. The guidelines should also aim to increase consistency across projects, where appropriate;
• implement quality assurance processes to provide assurance for financial reporting purposes;
• develop and implement a year-end close process to ensure that projects are up to date and complete for reporting as at 30 June. This should include examining the appropriateness of using budget figures to adjust asset roll-out costs; and
• consider implementing a time recording system to capture employee costs associated with each project. Costs should be capitalised to projects in accordance with AASB 116 Property, Plant and Equipment.

4.3.26 Defence has agreed to the recommendations made by the ANAO and has commenced a review and update of policies, processes and guidelines to improve the consistency of judgements across SME projects. The ANAO will review these processes as part of the 2021–22 audit cycle.

New moderate audit findings

SME Valuation Methodology

4.3.27 Defence holds a SME asset base to maintain its defence capability requirements and undertakes a fair value assessment of these assets in accordance with Australian Accounting Standard AASB 13 Fair Value Measurement. The SME balance at 30 June 2021 was $74.5 billion.

4.3.28 SME is valued internally by Defence. Valuation techniques are either market approach or cost approach, with varying inputs, including but not limited to adjusted market transactions, replacement cost of new assets, comparable assets and indexation. Defence uses judgement when selecting inputs to estimate the fair value due to the limited availability of observable market inputs such as reliable market prices from orderly transactions between market participants.

4.3.29 The ANAO assessed whether the selection of the method for determining fair value was appropriate for each class of SME and whether the key assumptions used in the valuation methodology were reasonable and appropriately supported.

4.3.30 The ANAO identified instances where the judgements supporting the valuation estimates were inconsistently applied or were not supported by a documented rationale. The ANAO also identified instances where the indexes used in valuations were not as at 30 June.

4.3.31 The ANAO also identified the following:

• Defence had not considered whether capabilities of similar assets could be adjusted to arrive at the asset’s current replacement cost when applying the comparator approach;
• Defence had not assessed the appropriateness of using adjusted market inputs when an asset had been constructed over an extended period of time;
• an assessment of the continued appropriateness of the application of indices for a particular asset had not been performed; and
• procedures to retrospectively assess whether estimates made in prior years were appropriate had not been implemented.

4.3.32 Weaknesses in the valuation methodology increase the risk of a material misstatement in the financial statements.

4.3.33 The ANAO recommended Defence:

• ensure documentation to support the valuation is comprehensive and demonstrates management’s assessment of estimation uncertainty; the consideration of alternative methodologies and assumptions;
• undertake a retrospective review to confirm the reliability of estimates made in prior years;
• consider engaging an external expert to review the valuation methodology and key assumptions designed to support the judgement that assets are held at fair value;
• assess the continued appropriateness of cost as an input of fair value where assets are capitalised across multiple financial years; and
• documentation of assessment performed to confirm the carrying amount of assets not subject to the current year comparator valuation approach are not materially different to fair value.

4.3.34 Defence agreed with the recommendation and will review the appropriateness of judgements and indices applied in the annual fair value assessment process and assess the viability of engaging external experts to assist with SME valuation. The ANAO will review the progress made as part of the 2021–22 audit.

Management of privacy data

4.3.35 Management of personally identifiable data is a responsibility of all Australian Government entities subject to the Privacy Act 1988. Under the Act, various supplementary directions such as the Australian Government Agencies Privacy Code (the Code) and the Australian Privacy Principles (APP) define an entity’s responsibility around the collection, use, storage and disclosure of personal information.

4.3.36 Defence has implemented a privacy policy which has been designed to inform individuals about the way Defence collects, stores, uses and discloses personal information. This policy also provides guidance to access, or seek correction of, personal information held by Defence.

4.3.37 In reviewing the privacy framework at Defence, the ANAO observed that:

• significant programs related to the management of personally identifiable information are outdated or scheduled for reviews that have not yet occurred;
• privacy impact assessments are not stored in an accessible format and are not searchable to discover known risks and impacts;
• there is no consistent data dictionary or data governance applied to allow for the discovery of specific data types across disparate applications and networks;
• information on historical data breaches is inconsistent across Defence, with no central repository or register to report against strategic risks; and
• compliance activities to ensure Defence is meeting the requirements are either not able to be performed or are not performed in a timely manner.

4.3.38 Defence was unable to provide evidence and assurance that personally identifiable information was being managed appropriately. The ANAO also identified that Defence has limited ability to discover systems that contain information that would be classified as personally identifiable information, as well as no systematic method for tracking changes, access or distribution of personally identifiable information.

4.3.39 The weaknesses observed increase the risk that privacy data may be accessed or modified by those without authorisation to do so, and discovery of this inappropriate activity may not be timely or accurate.

4.3.40 The ANAO has recommended that Defence:

• review its data governance framework and address control weaknesses surrounding the collection, use, storage and disclosure of personal information;
• establish a digital repository to index or record the locations, types of data, systems and other critical information relating to the management of personally identifiable information; and
• report regularly against compliance and application of the Privacy Policy as well as key indicators from the Code and APPs.

4.3.41 Defence advised that they will be instituting a number of remediation actions as part of the inaugural Defence Data Strategy 2021–23. The ANAO will review the implementation of the actions related to privacy data as part of the 2021–22 audit.

Resolved moderate audit finding

Segregation of duties’ deficiencies within the purchase and payable function

4.3.42 During 2019–20, the ANAO identified a lack of segregation between the critical procurement functions involving the creation/modification of vendor data, the raising and approval of a purchase order, the goods receipting function, and the payment authorisation process. The segregation of duties weaknesses related to procurements which were not subject to panel arrangements. The lack of segregation of duties increases the risk of fraud and/or financial loss.

4.3.43 In 2020–21 Defence implemented automated and manual controls to prevent officers from performing incompatible procurement functions. The ANAO has confirmed the implementation and tested the operation of these controls. Based on testing performed, sufficient evidence of the operating effectiveness was obtained to confirm that the identified issues had been resolved.

Unresolved moderate audit finding

Weaknesses around the governance of ADF health services

4.3.44 The provision of health services to ADF members is managed under a contract with an external service provider. The contract commenced on 1 July 2019 and includes two broad categories of charges covering off-base and on-base services. Defence undertakes a review of the fees and charges associated with off-base services to provide assurance that the invoiced amounts are accurate and valid.

4.3.45 As part of the interim audit, the ANAO identified weaknesses associated with the processes implemented by Defence to confirm the accuracy and validity of the service provider’s monthly invoices. The ANAO recommended Defence:

• examine and strengthen the design of processes to provide assurance over the accuracy and validity of the health service payments;
• extend assurance activities to include on-base services; and
• complete assurance activities in a timely manner and escalate issue to an appropriate level of management to ensure that issues can be dealt with promptly and recoveries initiated where required.

4.3.46 Defence has advised the ANAO that progress has been made to address the audit finding. The ANAO will examine the remediation activities undertaken as part of the 2021–22 audit.

Australian Signals Directorate

4.3.47 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, cybersecurity and offensive cyber operations, as directed by government. The Australian Cyber Security Centre, which is a part of ASD, provides support to government and the Australian community to improve Australia’s cyber resilience.

Summary of financial performance

4.3.48 The following section provides a comparison of the 2019–20 and 2020–21 key financial statements items (as outlined in Table 4.3.7) reported by ASD and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.7: Key financial statements items

Source: ASD’s audited financial statements for the year ended 30 June 2021.

4.3.49 Net cost of services has increased mainly due to growth in employee benefits expenses of $24.9 million; an increase in depreciation expenses of $33.3 million reflecting the roll out of assets under construction during the period; and an additional $95.8 million in supplier expenses incurred due to further procurement undertaken in 2020–21 compared with 2019–20 which was impacted by the COVID-19 pandemic.

4.3.50 Revenue from government increased as a result of new policy proposals being funded and indexation from the previous period. Total liabilities increased mainly due to growth in supplier payables of $45.5 million reflecting the additional supplier expenses incurred during 2020–21 as noted above. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.3.51 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 are outlined in Table 4.3.8.

Table 4.3.8: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and ASD’s audited financial statements for the year ended 30 June 2021.

Audit results

4.3.52 Table 4.3.9 summarises the status of audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.3.9: Status of audit findings

Source: ANAO 2020–21 audit results.

4.3.53 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that ASD’s 2020–21 financial statements were not materially misstated.

Resolved audit finding

Asset Capitalisation and Monitoring Process

4.3.54 The ANAO’s 2019–20 financial statements audit identified weaknesses in ASD’s asset management and accounting framework relating to assets under construction. At 30 June 2020 a material proportion of the asset under construction balance was identified as being completed and in service, however, the necessary accounting process to transfer these assets to the asset register had not occurred. As a result, a manual process to estimate the impact of depreciation of these assets was required to correctly account for these assets in the financial statements. The ANAO considers the timely transfer of assets under construction to the asset register a key control that supports: the accuracy of the financial statements, internal and external budget processes and is an important element of the internal control framework supporting the custody of assets managed by ASD.

4.3.55 In addressing the audit finding and the ANAO’s recommendations, ASD has:

• updated policies and procedures for project managers and asset custodians that explain accounting responsibilities and supported these procedures through the provision of training;
• reviewed the balance of assets under construction, identified completed and in service assets to be transferred to the asset register and updated the asset register with these details; and
• implemented revised monthly accounting processes to review and confirm with project managers that the assets under construction balance does not contain completed assets that otherwise require addition to the asset register.

4.3.56 As ASD has addressed the ANAO’s recommendations this audit finding has been resolved.

Australian War Memorial

4.3.57 The Australian War Memorial (AWM) has responsibility for commemorating, interpreting and understanding the Australian experience of war and its enduring impact through maintaining and developing the national memorial and its collection, and exhibiting historical material, and undertaking commemorative ceremonies and research.

Summary of financial performance

4.3.58 The following section provides a comparison of the 2019–20 and 2020–21 key financial statements items reported by the AWM (as outlined in Table 4.3.10) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.10: Key financial statements items

Source: AWM’s audited financial statements for the year ended 30 June 2021.

4.3.59 The increase in net cost of services was due to a reduction in revenue of $6.1 million during the year with the AWM closed for portions of 2020–21 and a large a decrease in collection donations of $2.6 million. This was partially offset with lower staff and operating costs with the AWM’s closure and reduced attendances due to the COVID-19 pandemic restrictions.

Key areas of financial statements risk

4.3.60 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that 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 2020–21 are provided in Table 4.3.11. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 4.3.11: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and AWM’s audited financial statements for the year ended 30 June 2021.

Audit results

4.3.61 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Defence Housing Australia

4.3.62 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

4.3.63 The following section provides a comparison of the 2019–20 and 2020–21 key financial statement items reported by the DHA (as outlined in Table 4.3.12) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.12: Key financial statements items

Source: DHA’s audited financial statements for the year ended 30 June 2021.

4.3.64 The decrease in income was mainly attributable to the decrease in sale of inventories as a result of holding back of inventory stock for investment purposes.

4.3.65 The decrease in total expenses related to a decrease in repairs and maintenance expense with the COVID-19 pandemic limiting the repairs and maintenance work undertaken during 2020–21, and the write-back of impairment of properties in the current year compared to write-down in last year due to uncertain market conditions. In addition, there has been a decrease in the cost of inventories sold which correlates to the decrease in sales.

4.3.66 The decrease in total assets is due to the repayment of loans, which also resulted in a corresponding decrease in total liabilities.

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 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 2020–21 are provided in Table 4.3.13.

Table 4.3.13: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and DHA’s audited financial statements for the year ended 30 June 2021.

Audit results

4.3.68 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Department of Veterans’ Affairs

4.3.69 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 legislation 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

4.3.70 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by the DVA (as outlined in Table 4.3.14 and Table 4.3.15) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.14: Key departmental financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2021.

4.3.71 The reduction in assets is due to the current year depreciation and amortisation of non-financial assets of $47.4 million offset by the addition of $12.4 million of assets. The reduction is offset by the increase in unspent appropriation of $20.8 million in 2020–21.

4.3.72 The reduction in liabilities is due to the principal repayment for lease liabilities of $18.7 million as well as a decrease in supplier payables of $7.6 million due to timing of payments runs at year-end.

Table 4.3.15: Key administered financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2021.

4.3.73 The increase in total expenses of $1,042.0 million is mainly attributed to the increase in the military compensation provision following an actuarial review offset by a reduction in personal benefit and health care payments as a result of a decline in client population.

4.3.74 Total liabilities increased due to the current year actuarial review of personal benefit and health care provisions of $11,742.0 million as a result of changes in the discount rate and claims experience.

Key areas of financial statements risk

4.3.75 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 2020–21 are provided in Table 4.3.16, including the area which was considered to be key audit matters (KAM) by the ANAO.

Table 4.3.16: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and DVA’s audited financial statements for the year ended 30 June 2021.

Audit results

4.3.76 The following table summarises the status of audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.3.17: Status of audit findings

Source: ANAO 2020–21 audit results

4.3.77 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that DVA’s 2020–21 financial statements were not materially misstated.

New moderate audit findings

Process direct implementation

4.3.78 In November 2020, income and student support payment processing functions were transferred to the Process Direct system from old systems. The move to Process Direct was a component of the Veteran Centric Reform (VCR) program.

4.3.79 ANAO identified weaknesses relating to security and data migration processes associated with the implementation of the upgrade. There was no authorisation to operate the system as required by the Protective Security Policy Framework and no system encryption. An authorisation to operate is important as it means that there is appropriate level of security over the system and that any residual risk has been accepted. The ANAO also noted that underlying activity to support an authorisation to operate, including approving of security documentation, testing for security vulnerabilities, documented security assessment, had not been performed.

4.3.80 DVA has advised that Process Direct was appropriately certified with all required security documentation in August 2021 and that a review of cybersecurity governance, including the development and strengthening of appropriate security policies will occur within 2021–22. The ANAO will review the work undertaken by DVA in relation to this issue during the 2021–22 audit.

Monitoring of high-risk activity in IT systems

4.3.81 DVA reviews all activities in IT systems that it classifies as high risk or a potential indicator of fraud. A software tool identifies this activity for review. As part of audit work undertaken, the ANAO identified that the software tool was no longer able to correctly identify high risk activity for review after a major IT change was implemented in November 2020.

4.3.82 DVA subsequently made changes to ensure that the software tool could correctly identify high risk activity and retrospectively reviewed all activity that had occurred from November 2020 to July 2021. The ANAO has recommended that DVA implement procedures to ensure that any future IT system changes do not compromise the software tool used to identify high risk activity for monitoring.

User terminations

4.3.83 The ANAO identified weaknesses in DVA’s controls relating to terminated users. There were no processes in place to identify users who had access to systems, applications and/or data repositories after cessation of employment or contract. Consequently, there was also no process to monitor activities undertaken by any users after access should have been removed.

4.3.84 After the ANAO identified this issue, DVA investigated activity of users after they had terminated and concluded that neither its data nor IT systems had been comprised. DVA has advised that it has introduced technology that enables DVA staff to action terminations in a timelier manner and that a new process to identify and assess access after termination has been implemented.

4.3.85 The ANAO will review the implementation and effective operation of the new processes as part of the 2021–22 financial statements audit.

User revalidations

4.3.86 A key aspect of system user management that protects systems and applications from exploitation is a regular user revalidation process that confirms only legitimate users have access to DVA systems and applications. ANAO noted that DVA does not have a user revalidation process in place for seven systems that support the financial statements.

4.3.87 DVA has advised that it will review cybersecurity governance and security policies to ensure they provide clear guidance regarding user revalidation and prescribe specific roles and responsibilities.

4.3.88 The ANAO will confirm the implementation and effective operation of the new processes as part of the 2021–22 financial statements audit.

QUASARS Claim Populations

4.3.89 QUASARS is a system used by DVA to select and perform quality assurance testing of decisions and payments made in relation to Income Support and Rehabilitation and Compensation. The results of quality assurance testing are used as a basis for DVA to quantify the potential error rate in personal benefit and health care payments that are made.

4.3.90 The ANAO identified that there were no processes in place to ensure the completeness and accuracy of data extracted from business systems and uploaded into QUASARS. In addition, there were no documented instructions that outline the information required in each report extracted. The ANAO performed additional audit procedures to obtain assurance over the completeness and accuracy of data uploaded in the QUASARS system.

4.3.91 DVA has advised the ANAO that it will undertake a review to document processes undertaken to extract and upload data and develop stronger protocols to ensure uploaded data is complete and accurate. DVA conducted a review of the data subsequent to the ANAO identifying this matter and no issues with completeness and accuracy were identified in the 2020–21 data. The ANAO will review this work as part of the 2021–22 audit.

Financial delegations

4.3.92 Financial delegations are a key part of DVA’s internal control framework and ensure appropriately skilled personnel perform key functions. In February 2021 changes were approved by the Secretary to financial delegations affecting spending limits. These approved changes were not updated in DVA’s financial management information system (FMIS) until July 2021. The ANAO performed additional testing to gain sufficient and appropriate audit evidence that DVA’s payments made through the FMIS were approved within the delegation limits set by the Secretary.

4.3.93 The department has advised the ANAO that it has subsequently performed a review of financial transactions between February 2021 and July 2021 and did not identify any approvals made that were above the delegation level. In addition, it has developed a process to ensure future changes to delegation limits are reflected in the FMIS in a timely manner. The ANAO will confirm the implementation and effective operation of the new processes as part of the 2021–22 audit.

Emphasis of Matter

4.3.94 The auditor’s report on the 2020–21 financial statements of DVA includes an emphasis of matter paragraph drawing attention to the significant uncertainty associated with a number of the assumptions used in the calculation of the personal benefit and health care provisions and to the sensitivity of the valuation of the provision to changes in these assumptions.

Comments on non-material entities

Royal Australian Navy Relief Trust Fund

4.3.95 The Royal Australian Navy Relief Trust Fund (the Fund) was established to provide interest free loans to current and ex-navy personnel to assist with small expenditure items. Interest free loans of up to $7,000 may be approved where eligibility criteria have been met. In accordance with the Services Trust Fund’s Act 1947, a person who is a Trustee or a dependant of a Trustee of any fund shall not receive benefits from the Fund.

Audit results

4.3.96 Table 4.3.18 below summarises the status of the audit findings reported by the ANAO in 2019–20 and 2020–21.

Table 4.3.18: Status of audit findings

Source: ANAO 2020–21 audit results.

New significant legislative breach

Related party transaction

4.3.97 During the audit, the ANAO identified that a loan including an administration fee had been made to a related party in contravention of paragraph 14 of the Services Trust Fund’s Act 1947. The ANAO recommended that the Fund strengthens its policies and procedures to prevent any payments being made in contravention of legislative obligations.

4.4 Education, Skills and Employment portfolio

Portfolio overview

4.4.1 The Education, Skills and Employment portfolio’s purpose is to contribute to Australia’s economic prosperity and social wellbeing by creating opportunities and driving better outcomes for people through education, skills and employment pathways. Table 4.4.1 identifies material and other entities specifically mentioned in this chapter.

Table 4.4.1: Education, Skills and Employment portfolio material and other entities discussed in this chapter

4.4.2 The Department of Education, Skills and Employment (DESE) is the lead entity in the portfolio and is responsible for ensuring Australians can experience the social wellbeing and economic benefits that quality education, training and employment provide.

4.4.3 In addition to DESE, there are six entities in the portfolio that have responsibility for working with state and territory governments, other Australian Government entities and service providers to provide policy advice and services to benefit Australians.

4.4.4 Figure 4.4.1 shows the Education, Skills and Employment portfolio’s income, expenses, assets and liabilities.

Figure 4.4.1:  Education, Skills and Employment portfolio income, expenses, assets and liabilities

 

 

Source: 2020–21 CFS.

4.4.5 As previously outlined in Chapter 2, paragraph 2.7, analysis of the quality and timeliness of financial statements preparation included a summary of the total number of audit differences reported to entities during the 2020–21 financial statements audit. Table 4.4.2 provides a summary of those audit differences that relate to entities within the DESE portfolio.

Table 4.4.2: The number of audit differences for entities in the Education, Skills and Employment portfolio

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

4.4.6 The following sections provide a summary of the 2020–21 financial statements audit results for all material entities within the DESE portfolio and significant or moderate findings relating to non-material entities.

Department of Education Skills and Employment

4.4.7 The Department of Education, Skills and Employment (DESE) works with state and territory governments, other government entities and a range of stakeholders to ensure Australians can experience the social wellbeing and economic benefits that quality education, skills and employment provide.

4.4.8 DESE continues to support the formulation and delivery of initiatives including the ongoing response to the COVID-19 pandemic. The department is delivering key elements of the Government’s five-year JobMaker Plan, including supporting Australians back into jobs by investing in skills and higher education and helping job seekers reconnect with employment. The department also continues to support the provision of essential services on which Australians rely including childcare, schooling, training, higher education, and employment services.

4.4.9 The Administered Arrangement Order (AAO) of 18 March 2021, transferred responsibility for the coordination of youth affairs from the Health portfolio to the Education Skills and Employment portfolio.

Summary of financial performance

4.4.10 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by DESE (as outlined in Table 4.4.3 and Table 4.4.4) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.3: Key departmental financial statements items

Source: DESE’s audited financial statements for the year ended 30 June 2021.

4.4.11 The $58.2 million increase in the net cost of services was mainly the result of increased consultants’ costs for the upgrade to the National Employer Service Management IT system.

4.4.12 Revenue from government increased by $185.1 million due to additional funding for the JobMaker packages for higher education, skills, apprenticeships and employment services, and continuation of the COVID-19 pandemic response.

4.4.13 The increase in assets is primarily due to an increase in appropriation receivable, consistent with an underspend in departmental operations, and increased investment in IT systems such as: the new employment services model; and internally developed software in respect of the Employment Services System, Higher Education Integration Management System, and Schools Data Collections Migration System; and other asset replacements.

Table 4.4.4: Key administered financial statements items

Note a: DESE has restated prior year figures in the 2020–21 financial statements and Table 4.4.4 has been adjusted to reflect these changes.

Source: DESE’s audited financial statements for the year ended 30 June 2021.

4.4.14 The increase in total expenses related to $1.0 billion increased support to universities for higher education research, increased childcare funding, and increased emergency assistance as part of the COVID-19 response initiatives.

4.4.15 The increase in administered income primarily relates to a $589.6 million fair value gain that was recognised in 2020–21 for the estimated Higher Education Loan Program (HELP) receivables at year-end. This was partially offset by a decrease in interest income associated with HELP debt, due to a drop in interest rates compared to the prior year.

4.4.16 The increase in administered assets was primarily due to a $3.1 billion increase in receivables, including advances and loans, for higher education and vocational students and trade support loans. The value of these receivables at year-end was based on actuarial assessments which relied on assumptions regarding the collectability of repayments and future employment and salary rates, and discount factors, that contain a significant degree of uncertainty and are influenced by the wider economic environment.

4.4.17 The reduction in administered liabilities was due to a decrease of $372.8 million in the present value of the Commonwealth’s total superannuation liabilities in respect of current and former university employees who are members of state superannuation schemes. The remaining movements related mainly to personal benefit provisions at year-end.

Key areas of financial statements risk

4.4.18 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DESE’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 2020–21 are provided in Table 4.4.5, 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 4.4.5: Key area of financial statements risk

Source: ANAO 2020–21 audit results, and DESE’s audited financial statements for the year ended 30 June 2021.

4.4.19 The following Auditor-General Reports were tabled during 2020–21:

• Auditor-General Report No.32 of 2020–21 Cyber Security Strategies of Non-Corporate Commonwealth Entities (across entities);
• Auditor-General Report No.37 of 2020–21 Monitoring the Impact of Government School Funding – follow up; and
• Auditor-General Report No.48 of 2020–21 Effectiveness of Planning and Implementation of Reform by the Australian Skills Quality Authority.

4.4.20 While these reports did not include recommendations regarding risks to DESE’s financial administration as it relates to the financial statements, the observations of these reports were considered in designing audit procedures.

Audit results

4.4.21 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Australian Research Council

4.4.22 The Australian Research Council’s (ARC’s) purpose is to grow knowledge and innovation for the benefit of the Australian community through funding the highest quality research, assessing the quality, engagement and impact of research, and providing advice on research matters.

Summary of financial performance

4.4.23 The following section provides a comparison of the 2019–20 and 2020–21 key departmental and administered financial statements items reported by ARC (as outlined below in Table 4.4.6 and Table 4.4.7) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.4.6: Key departmental financial statements items

Source: ARC’s audited financial statements for the year ended 30 June 2021.

4.4.24 The movement in balances reflect normal business activity.

Table 4.4.7: Key administered financial statements items

Source: ARC’s audited financial statements for the year ended 30 June 2021.

4.4.25 The increase in total liabilities is due to updated funding caps under the Australian Research Council Act 2001 in May 2021, and delays in the grant programs due to the COVID-19 pandemic. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

4.4.26 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 ARC’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The areas highlighted for specific audit coverage in 2020–21 are provided in Table 4.4.8. No significant or moderate audit findings were identified relating to the key areas of risk.

Table 4.4.8: Key areas of financial statements risk

Source: ANAO 2020–21 audit results, and ARC’s audited financial statements for the year ended 30 June 2021.

Audit results

4.4.27 There were no significant or moderate audit findings arising from the 2019–20 or 2020–21 financial statements audits.

Comments on non-material entities

Australian National University

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

Audit results

4.4.29 Table 4.4.9 below summarises the status of the audit findings reported by the ANAO as a result of the audits for the years ending 31 December 2019 and 31 December 2020.

Table 4.4.9: Status of audit findings

Source: ANAO 2020 audit results.

Resolved moderate audit findings

Data integrity post the ANU data breach

4.4.30 In June 2019, it became public that there were cyber intrusions to the ANU’s systems and data. It was revealed that this access included a presence in the Enterprise System Domain (ESD) where data was held for the financial system and the human resources/payroll system (PeopleSoft).

4.4.31 During 2020 the ANU has undertaken work to uplift ANU’s capability to prevent, detect and respond to security incidents. This includes finalising operating procedures which establishes processes for how the ANU will respond to any future data breaches. The ANAO has confirmed that these processes have been implemented and as a result the issue is resolved.

Completeness of bank accounts in the general ledger

4.4.32 During the 2019 audit process of verifying bank accounts to external confirmations, it was noted that there was a bank account in existence which had been opened during July 2019 and had a balance of 15,000 Euro. This had not been reflected in the general ledger. On further investigation it was discovered that the bank account had been opened without following the due process which the ANAO understands, included the completion of a specific form which authorises the creation of the relevant ledger account. This represented a significant control breakdown.

4.4.33 In 2020 ANU strengthened controls around cash management for the opening and closing and reporting of ANU bank accounts. The ANAO has confirmed that these processes have been implemented and as a result the issue is resolved.