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, performance statements 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 2021–22 audits of the Australian Government’s Consolidated Financial Statements (CFS) and 247 Australian Government entities.¹ The Auditor-General Report No. 32 2021–22 Interim Report on Key Financial Controls of Major Entities, focused on the interim results of the audits of 25 of these entities.

Consolidated financial statements

Audit results

4. The CFS presents the whole of government and the General Government Sector financial statements. The 2021–22 CFS was signed by the Minister for Finance on 16 November 2022 and an unmodified auditor’s report was issued on 17 November 2022.

5. There were no significant or moderate audit issues identified in the audit of the CFS in 2021–22 or 2020–21.

Australian Government financial position

6. The Australian Government’s net worth deficiency decreased from $743.2 billion in 2020–21 to $607.2 billion in 2021–22. Over the period 2012–13 to 2021–21, total assets increased from $430.8 billion to $1,053.3 billion, total liabilities increased from $641.4 billion to $1,660.5 billion and net worth has decreased from a deficit of $210.5 billion to a deficit of $607.2 billion (see paragraphs 1.16 to 1.32).

Financial audit results and other matters

Use of appropriations

7. The Department of Defence used non-operating funding available from Appropriation Act (No. 2) 2020-21 for the termination payment in relation to the cancelled Attack Class submarine project (operating expenditure). It is not clear that the Parliament, in passing the Act, intended for an appropriation for non-operating expenditure to be used for the purpose of funding Defence’s operating expenditure. Subsequent AGS and Department of Finance advice has not considered this to be inconsistent with the Appropriation Acts.

8. The risk for the Parliament from this precedent is that the controls and framework supporting the appropriation and expenditure of funds it may have reasonably considered to be in place, for example that an appropriation for non-operating purposes could only be used for that purpose, may not in fact exist or are being followed by entities (see paragraphs 4.3.41 to 4.3.51).

Quality and timeliness of financial statements preparation

9. The ANAO issued 237 unmodified auditor’s reports, including the CFS, and one modified auditor’s report, as at 2 December 2022. A quality financial statements preparation process will reduce the risk of inaccurate or unreliable reporting.

10. The ANAO noted an increase in findings relating to processes supporting financial statements preparation, decline delivery of draft financial statements in line with entity financial statements project plans, an increase in the number of unadjusted audit differences and an increase in overall total value of unadjusted audit differences reported to entities in 2021–22 compared to 2020–21 (see paragraphs 2.10 to 2.22).

Timeliness of financial reporting

11. The financial statements were finalised, and auditor’s reports issued for 86 per cent of entities within three months of the financial year-end. On average it took entities 44 days after the auditor’s report was issued for annual reports to be tabled in Parliament. Eighty-six 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 entities required to table annual reports, eight per cent had not tabled an annual report as at 2 December 2022 (see paragraphs 2.23 to 2.31).

Key audit matter reporting

12. 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. 32 2021–22 Interim Report on Key Financial Controls of Major Entities and the CFS. In 2021–22 a total of 57 key audit matters (KAM) were included across the 25 entities and seven KAM were included in the CFS auditor’s report (see paragraphs 2.32 to 2.35).

Removal of user access

13. The ANAO has identified that several government entities have not implemented effective controls relating to the timely removal of user access. This is consistent with issues previously reported by the ANAO. The ANAO assessed termination controls in place at government entities and found that the majority of entities assessed do not have an effective control to monitor access or activity in entities systems after user cessation. The weaknesses identified by the ANAO pose an increased risk of unauthorised access to systems and data (see paragraphs 2.98 to 2.106).

Financial sustainability

14. 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. The ANAO analysis concluded that the financial sustainability of the majority of entities was not at risk (see paragraphs 2.36 to 2.57).

Summary of audit findings

15. A total of 175 findings were reported to entities as a result of the 2021–22 financial statements audits. These comprised one significant, 27 moderate, 132 minor findings and 15 legislative findings. The highest number of findings are in the categories of:

• IT security management and user access; and
• accounting and control of non-financial assets.

16. Of the 15 legislative findings reported, three were significant legislative breaches, one of which has remained open since 2012–13 (see paragraphs 2.58 to 2.95).

Reporting and auditing frameworks

Changes to the Australian public sector reporting framework

17. There are no significant changes to accounting standards affecting the Commonwealth for 2022–23. The revised requirements for Australian Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement effective for financial years commencing 2022–23 have been incorporated into the ANAO’s audit methodology (see paragraphs 3.6 to 3.10).

18. Assessment of the ethical use of public resources beyond technical compliance with rules and policy frameworks is a new and evolving area of focus, and the ANAO has developed a framework to test ethical use of resources. Sustainability reporting is also a rapidly emerging area of interest, and the ANAO is contributing to discussions as reporting and assurance standards develop(see paragraphs 3.11 to 3.22).

19. The ANAO quality assurance framework is being updated to ensure compliance with the new and revised Australian Quality Management Standards effective 15 December 2022. The revised standards introduce a framework for quality management that is focused on proactively identifying and responding to quality risks (see paragraphs 3.23 to 3.29).

20. Data analytics continues to be a focus for the ANAO, and audits undertaken in 2021–22 have continued to build on previous initiatives to enhance audit quality and efficiency (see paragraphs 3.30 to 3.32).

Cost of this report

21. 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 2021–22 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, particularly 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 in the preparation of the CFS where compliance with the GFS Manual would not conflict with Australian Accounting Standards.

Key areas of financial statements risk

1.4 The ANAO’s 2021–22 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). The KAM for 2021–22 are consistent with 2020–21.²

Table 1.1: Key areas of financial statements risk

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

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

Source: ANAO 2021–22 audit results, and the CFS for the year ended 30 June 2022.

Audit results

1.5 The 2021–22 CFS was signed by the Minister for Finance on 16 November 2022 and the Auditor-General’s unmodified auditor’s report was issued on 17 November 2022.

1.6 There were no significant or moderate audit findings arising from the 2020–21 or 2021– 22 financial statements audits of the CFS.

Australian Government’s financial outcome

Operating result

1.7 The following key financial measures were reported for 2021–22:

• net operating balance was a deficit of $20.5 billion (compared to a deficit of $130.5 billion in 2020–21);
• operating result was a surplus of $28.4 billion (compared to a deficit of $97.9 billion in 2020–21); and
• comprehensive result (change in net worth) was an increase in net worth of $135.9 billion (compared to a decrease of $63.4 billion in 2020–21).

1.8 The net operating balance has remained in a deficit. The deficit has however reduced due to a 15.2 per cent increase in revenue of $82.0 billion, an 80.2 per cent decrease in subsidy expenses of $68.4 billion, partially offset by a 14.7 per cent increase in the supply of goods and services expenses of $22.2 billion and an 11.3 per cent increase in grants (current and other capital) of $20.4 billion (11.3 per cent).

1.9 Total revenue increased primarily due to higher taxation revenue (mainly individual income, company and superannuation fund taxation) as a result of the stronger labour market conditions, higher commodity prices and higher earnings and contributions on superannuation funds compared with 2020–21.

1.10 The major reasons for changes in expenses in 2021–22 include:

• a decrease in subsidy expenses of $68.4 billion, primarily reflecting the cessation of COVID-19 pandemic programs including JobKeeper and cash flow boost payments to employers;
• an increase of $22.2 billion for supply of goods and services including an increase in payments to participants under the National Disability Insurance Scheme ($5.3 billion), increased spending on medical and pharmaceutical benefits ($5.4 billion) and an increase in the general supply of goods and services ($9.9 billion); and
• additional grants expenses of $20.4 billion mainly relating to increased payments to States and Territories under national partnership arrangements and for GST distribution.

1.11 The Australian Government’s operating result was a surplus for 2021–22, compared to a deficit in 2020–21. The operating result reflects the net operating balance, plus fair value gains of $54.4 billion (2020–21: $53.8 billion) attributable to collective investment vehicles and investments administered by the Future Fund Management Agency.

1.12 The comprehensive result (improvement in net worth) is the sum of the operating result surplus of $28.4 billion, the actuarial revaluation superannuation gain of $95.2 billion and revaluations of non-financial assets of $10.1 billion. The actuarial gain on superannuation relates mainly to changes in the discount rate used in the estimation of the liability which reflect increases in the Australian Government bond rate. An increase in the discount rate has the effect of reducing the present value of estimated value of future superannuation liabilities and resulting in an actuarial gain. The revaluations of non-financial assets include an increase in the valuation of specialist military equipment of $4.4 billion, buildings of $2.0 billion and other plant, equipment and infrastructure of $1.2 billion.

Revenue by source

1.13 The Australian Government’s revenue for the year ended 30 June 2022 was $623.2 billion (compared to $541.2 billion for the year ended 30 June 2021). Figure 1.1 provides an analysis of revenue by source from 1 July 2017 to 30 June 2022. Each revenue source as a percentage of total revenue has remained reasonably steady with proportion of taxation revenue decreasing slightly from 91.3 per cent in 2017–18 to 88.2 per cent in 2021–22. Sale of goods and services has continued to increase, from 4.5 per cent to 6.0 per cent and interest income has doubled from 1.0 per cent to 2.1 per cent during the same period. Taxation revenue including company tax, individual tax and sales taxes remains the major source of government revenue.

Figure 1.1: Australian Government revenue by source from 2017–18 to 2021–22

Note a: In the 2021–22 financial year the main sources of taxation revenue included individual tax (48.2 per cent), company tax (22.9 per cent), sales taxes (14.4 per cent), superannuation fund taxes (4.8 per cent), excise duty revenue (4.1 per cent), and customs duty revenue (3.1 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, revenue from postal services and broadband network revenue.

Source: ANAO analysis of the CFS from 2017–18 to 2021–22.

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 2017 to 30 June 2022. As a percentage of total expenses, each function has remained stable during this period, except for ‘Other economic affairs’. During 2019–20 and 2020–21 the ‘Other economic affairs’ function included higher expenses due to the JobKeeper and cash flow boost payments administered by the Australian Taxation Office to support businesses impacted by the effects of the COVID-19 pandemic.

1.15 The function “Other purposes” includes interest expense attributable to debt issued by the Australian Office of Financial Management. The interest expense included in this function increased by 8.8 per cent, from $17.0 billion in 2017–18 to $18.5 billion in 2021–22.

Figure 1.2: Proportion of expenses of Government by function from 2017–18 to 2021–22

Note a: The ‘Other purposes’ function includes interest on Australian Government debt.

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

Note c: Other expenses include payments to: agriculture, forestry and fishing; fuel and energy; housing and community amenities; mining, manufacturing and construction; public order and safety; recreation and culture; transport and communications.

Source: ANAO analysis of the CFS from 2017–18 to 2021–22.

Australian Government’s financial position

Net worth

Changes in the Australian Government’s net worth from 1 July 2021 to 30 June 2022

1.16 The Australian Government’s net worth deficiency reduced from $743.2 billion in 2020– 21 to $607.2 billion in 2021–22. Figure 1.3 provides an analysis of the movement in net worth from 1 July 2021 to 30 June 2022.

Figure 1.3: Changes in the Australian Government’s net worth from 1 July 2021 to 30 June 2022

Source: ANAO analysis of the 2021–22 CFS.

1.17 Table 1.2 provides commentary on the main contributors to the change in net worth of the Australian Government identified in Figure 1.3.

Table 1.2: Explanation of key movements in net worth

Source: ANAO analysis of the 2021–22 CFS.

Changes in the Australian Government’s net worth from 2012–13 to 2021–22

1.18 Figure 1.4 illustrates the total assets, total liabilities and net worth of the Australian Government since 2012–13. Total assets increased from $430.8 billion to $1,053.4 billion, total liabilities increased from $641.4 billion to $1,660.5 billion and net worth has decreased from a deficit of $210.5 billion to a deficit of $607.2 billion.

Figure 1.4: Australian Government’s total assets, total liabilities and net worth, from 2012–13 to 2021–22

Source: ANAO analysis of the CFS from 2012–13 to 2021–22.

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

• investments, loans and placements and equity investments increased from $226.2 billion in 2012–13 to $639.9 billion in 2021–22. A major contributor to this class of assets is the Australian Government’s holding of investments in the Future Fund and other Australian Government Investment Funds such as the Medical Research Future Fund; and
• advances paid and receivables, which increased from $72.8 billion in 2012–13 to $139.2 billion in 2021–22. This balance includes student loans and taxes receivable.

1.20 The increase in total liabilities is the result of:

• government securities, increased from $284.2 billion in 2012–13 to $576.5 billion in 2021– 22;
• deposit liabilities held, from $6.1 billion in 2012–13 to $426.1 billion in 2021–22; and
• employee liabilities, including superannuation liabilities and military compensation provision, from $210.8 billion in 2012–13 to $358.9 billion in 2021–22.

1.21 There has continued to be a steady growth in net debt as a percentage of Gross Domestic Product (GDP) since 2012–13 growing from 4.9 per cent to 18.7 per cent in 2021–22. The net debt as a percentage of GDP improved from 23.9 per cent in 2020–21. Net interest payments were $7.3 billion in 2021–22 compared to $12.9 billion in 2020–21, reflecting an increase in interest income.³ Figure 1.5 illustrates the change in the indicators of the net financial position and net interest payments of the Australian Government since 2012–13 as a per cent of GDP.

Figure 1.5: Australian Government net debt position as per cent of GDP, from 2012–13 to 2021–22

Source: ANAO analysis of 2021–22 commentary on the CFS.

Government securities

1.22 Government securities are primarily issued to meet the financing needs to the Australian Government and are issued 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 2012–13 to 2021–22.

Figure 1.6: Australian Government revenue and expense for the period 2012–13 to 2021–22

Source: ANAO analysis of the CFS from 2012–13 to 2021–22.

1.23 The decrease in fair value of government securities 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

1.24 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 for these schemes was $322.0 billion as at 30 June 2022 ($407.5 billion as at 30 June 2021). The significant balances of the reported net liability relate to the following schemes that are closed to new members:

• Commonwealth Superannuation Scheme ($71.2 billion);
• Public Sector Superannuation Scheme ($107.4 billion);
• Military Superannuation Benefits Scheme ($101.6 billion); and
• Defence Force Retirement and Death Benefits Scheme ($36.1 billion).

1.25 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 2021 and 30 June 2022.⁴ 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.

1.26 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 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.

1.27 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 2012–13 to 2021–22.

Figure 1.7: Total value of Australian Government superannuation liabilities and Future Fund investments, and the target asset level, from 2012–13 to 2021–22

Source: ANAO analysis of the 2021–22 CFS and the Target Asset Level Declaration issued by the designated actuary of the Future Fund on 25 June 2021.

1.28 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’s 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.

1.29 Figure 1.7 shows that the 2021–22 estimate of the TAL is $215.1 billion⁵ which is above the current Future Fund net asset balance of $195.1 billion (2021: $191.4 billion). The Future Fund Act 2006 permits drawdowns, to fund superannuation payments, from 1 July 2020 or when the balance of the Future Fund equals or exceeds the TAL. In 2017 the Australian Government announced it would delay drawdowns from the Future Fund until at least 2026–27.

Non-financial assets

1.30 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 2022 were $265.6 billion ($248.1 billion for the year ended 30 June 2021). Figure 1.8 provides an analysis of non-financial assets by class from 1 July 2017 to 30 June 2022.

Figure 1.8: Australian Government assets by class from 2017–18 to 2021–22

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

Source: ANAO analysis of the CFS from 2017–18 to 2021–22.

1.31 During the period 2017–18 to 2021–22 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 31.7 per cent in 2017–18 to 30.6 per cent in 2021–22. Whilst the total proportion of the balance of total non-financial assets has decreased, the balance increased by $19.2 billion over the five-year period, reflecting capability acquisition and development and fair value changes; and
• buildings increased from 14.9 per cent in 2017–18 to 19.1 per cent in 2021–22. 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.

1.32 The balance of intangibles includes computer software and other intangibles such as the Australian Government’s portfolio of water entitlements. During the period 2017–18 to 2021–22, while the proportion of intangibles as a total of non-financial assets has remained stable, the value of intangibles has increased by 29.7 per cent from $11.6 billion in 2017–18 to $15.0 billion in 2021–22.

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. These investments are referred to as alternative financing arrangements.

1.35 The Parliamentary Budget Office (PBO) has noted that — ‘under successive governments there has been a shift toward delivering more government policies using alternative financing arrangements rather than direct payments’.⁶ The Joint Committee of Public Accounts and Audit (JCPAA) conducted an inquiry into Alternative Financing Mechanisms and released its report in March 2022.⁷

1.36 The JCPAA recommended that the Minister for Finance ‘consider changes to improve transparency for equity investments consistent with proposed improvements identified by the PBO to budget reporting to assist Parliament in scrutinising investments for policy purposes. The Department of Finance has advised the JCPAA that options for enhancing the transparency of equity investments will be considered by the Government ahead of the 2023–24 Budget.

1.37 Segregating the commercial and non-commercial portions of the investments to better reflect the implications on key fiscal aggregates in the financial statements would also be beneficial. This would improve transparency on where the Government for policy purposes, is investing and seeking a return on equity, which is lower than what the market would expect to proceed with the investment.

1.38 Two key items included in investments made for public 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)

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

1.40 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.

1.41 Most of these investments are in entities that provide a positive real return⁸ to the GGS over the life of the investment and are classified as equity injections. Examples of 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.

1.42 ARTC’s accounting policy for the assets constructed in relation to the Inland Rail Line is to impair the expenditure based on the forecast net present value of the project to nil value on the construction of Inland Rail. This impairment is based on the judgement that that the discounted future net cash flows from the operation on the Inland Rail are less than the cost of construction. 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 the investment is not reflected in the net operating balance or underlying cash balance.

1.43 Table 1.3 shows investments made in Australian Government entities primarily involved in the construction of non-financial assets where the equity contributed is greater than $400.0 million.

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

Note a: The net equity deficiency reported by NBN Co is mainly due to an increase in the company’s borrowings for medium term notes and private debt during 2021–22.

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 and the development of a 660 megawatt power station at Kurri Kurri (Hunter Power 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.

Source: ANAO analysis of 2021–22 CFS and entity financial statements.

Concessional loans

1.44 There has been a sustained 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 2012–13 to 2021–22.

Figure 1.9: Australian Government advances paid from 2012–13 to 2021–22

Source: ANAO analysis of the CFS from 2012–13 to 2021–22.

1.45 The Higher Education Loan Program (HELP) is the largest Australian Government concessional loan program (part of student loans of $32.3 billion in 2012–13 to $52.0 billion in 2021–22) which is recorded by the Department of Education, Skills and Employment (DESE). HELP provides financial assistance to students through income contingent loans to remove up-front const barriers to tertiary education.

Administration of Concessional Loans

1.46 There are three Australian Government entities that are established for the purpose of issuing concessional loans and have made advances or commitments greater than $500 million in 2021–22, in addition to the HELP loans administered by DESE and significant loan balances held by AOFM relating to historic State financing arrangements. The Commonwealth entities are as follows:

• 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 Export Finance Australia (EFA) to provide loan management services and other administrative support. During 2021–22, NHFIC raised $198.0 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 Infrastructure, Transport, Regional Development and Communications.

1.47 During the 2021–22 financial year, NHFIC, RIC and NAIF 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 increased during 2021–22 compared with 2020–21.

Table 1.4: Loan transactions during 2021–22

Note a: Loan commitments represent the number and value of loans that were approved during the period. Loan advances represent the amount of funds that were advanced in respect of new or previously approved loan commitments during the period.

Source: ANAO analysis provided by entities and 2021–22 annual reports.

Definitions used in this chapter

1.48 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. [Internet], available from https://www.rba.gov.au/glossary/ [accessed 23 November 2022].

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. This chapter summarises the results of the 2021–22 financial statements audits and provides commentary on specific topics which relate to the governance and administration of entities.

Summary of 2021–22 auditor’s reports

2.2 This report is based on the portfolio arrangements established by the Administrative Arrangements Order of 18 March 2021 incorporating amendments up to 30 June 2022. Administrative Arrangement Orders commencing after 30 June 2022 including the Administrative Arrangement Orders signed 1 June 2022 and 23 June 2022 to commence 1 July 2022 are not taken into consideration. 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.

2.3 A comparison of the number and type of auditor’s reports issued by the Auditor–General and his delegates in 2020–21 and 2021–22 (as at 2 December 2022), including the CFS is summarised at Table 2.1.

Table 2.1: Summary of auditor’s reports issued and outstanding as at 2 December 2022

Note a: Six of the unmodified auditor’s reports included an emphasis of matter. The six entities are: ANSTO Nuclear Medicine Pty Ltd, Gagudju Crocodile Hotel Trust, Northam Solar Project Partnership, Department of Veterans’ Affairs, Seafarers Safety, Rehabilitation and Compensation Authority and Kakadu Tourism (GCH) Pty Ltd. For details of each emphasis of matter refer to Chapter 4.

Note b: National Australia Day Council. For further details of the current year qualification, refer to Chapter 4, paragraphs 4.12.44– 4.12.49.

Note c: As at 2 December 2022, the 2021–22 financial statements audits had not been finalised for the following entities: Anindilyakwa Land Council, Army and Air Force Canteen Service, Australian Secret Intelligence Service, Bundanon Trust, Grains Australia Limited, Royal Australian Air Force Welfare Trust Fund, Royal Australian Navy Central Canteens Board, Wheat Quality Australia, Win with Navy Ltd, and Tiwi Land Council.

Note d: As at 19 November 2021, 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. These audits were subsequently finalised by the ANAO.

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

Note f: On 30 November 2022, the ANAO issued a new 2020–21 Auditor’s report for the Royal Australian Air Force Welfare Recreational Company as the company re-presented its financial statements for audit. For further details refer to paragraph 2.94.

Source: 2020–21 and 2021–22 ANAO auditor’s reports.

2.4 The Norfolk Island Health and Residential Aged Care Service (NIHRACS) is deemed to be a Commonwealth controlled entity. NIHRACS is a body corporate with perpetual succession under the Norfolk Island Health and Residential Aged Care Act 1985, a Norfolk Island continued law under section 16A of the Norfolk Island Act 1979 (Cth). The Public Governance, Performance and Accountability Act 2013 does not apply to NIHRACS and as a result the Auditor-General is not appointed as the auditor under the NIHRACS enabling legislation. The ANAO undertakes the audit as an audit arising from a request by the Secretary of Infrastructure made under section 20 of the Auditor-General Act 1997. The NIHRACS financial statements audit has not been completed for 2019–20 due to delays in the finalisation of the financial statements by NIHRACS. The financial statements for 2020–21 and 2021–22 have not been presented for audit.

Internal control environment

2.5 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.

2.6 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 2.98 to 2.106.

2.7 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.

2.8 The ANAO identified a significant finding and a number of moderate findings for one entity (2020–21: 2 entities) which reduced the level of confidence and assurance that could be placed on the key elements of internal control.⁹ For 16 entities (2020–21: 11 entities), apart from moderate audit findings, the key elements of internal control were operating effectively to support the preparation of financial statements free from material misstatement.¹⁰

2.9 These significant and moderate audit findings are outlined at Chapter 4. An analysis of the all audit findings identified by the ANAO in 2021–22 including the categories and nature of the findings identified is available at paragraph 2.58 - 2.95.

Quality and timeliness of financial statements preparation

2.10 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.¹¹

2.11 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.

2.12 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.

2.13 Each year the ANAO reports on the quality of financial statements preparation to entities. At the completion of the 2021–22 financial statements audits, the ANAO reported nine minor findings relating to processes supporting financial statements preparation (2020–21: eight minor findings). Analysis of the financial statements preparation process findings identified is available at paragraph 2.60.

2.14 In 2021–22, 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.

2.15 Timeliness in financial statements preparation in 2021–22 declined compared to 2020–21, with delivery of financial statements in line with the agreed timeframes achieved by 65 per cent of entities (2020–21: 72 per cent). A further 18 per cent of entities delivered financial statements within one week of the agreed timeframe (2020–21: 13 per cent). The remaining 17 per cent of entities provided their financial statements on average 16 working days after the agreed timeframe (2020–21: 16 days).

2.16 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.¹² The total number of audit differences identified in 2021–22 increased compared with 2020–21. A total of 225 audit differences were identified in 2021–22 (2020–21: 213).

2.17 A key indicator of the quality of entity financial statements is whether audit differences identified are adjusted by entities. Of the 225 audit differences identified, 100 or 44 per cent remained unadjusted by entities (2020–21: 91 or 41 per cent). Of these unadjusted differences, 55 related to material entities (2020–21: 50 material entities).¹³ The unadjusted differences, both in aggregate and individually, did not result in a material misstatement to the financial statements of the audited entities in 2021–22.

2.18 Table 2.2 shows that the net value impact of unadjusted audit differences compared to prior year has decreased for liabilities and increased for expenses, revenue, assets, and equity. There has been a large increase in debit and credit impact compared to 2020–21 for assets. This was largely driven by adjustments to non-financial assets identified in the audit of the Department of Defence (this is a key area of focus for the ANAO’s financial statements audit of the department).

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

Source: ANAO analysis of entity closing reports.

2.19 The Department of Finance’s (Finance) Financial Statements Better Practice Guide indicates that ‘better practice entities will promote an environment in which the correction of errors or misstatements is seen as an appropriate course of action, regardless of whether or not they are considered to be material’.¹⁴

2.20 The ANAO also considers the impact of the unadjusted audit differences on the CFS. Of the unadjusted differences identified in the 2021–22 financial statements audits, a total of seven adjustments relating to two entities were reported to Finance who prepare the CFS and were subsequently adjusted. The two entities were the Australian Taxation Office and the Department of Defence.

2.21 The ANAO reported an increase in findings related to processes supporting financial statements preparation, a decline in the delivery of draft financial statements in line with entity financial statements project plans, an increase in the number of unadjusted audit differences and an increase in overall total value of unadjusted audit differences reported to entities in 2021–22 compared to 2020–21. These factors indicate there remains an opportunity to improve quality assurance frameworks over financial statements processes.

2.22 The findings indicate that there are opportunities for entities to improve 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

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

2.24 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 decreased from 2020–21. Eighty-six per cent of financial statements were signed and associated auditor’s reports issued, within three months of year-end compared to 89 per cent in 2020–21. 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, which is unchanged compared to 2020–21.

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

Source: ANAO data

2.25 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 247 mandated financial statements audits, 185 entities are required to present annual reports to the responsible minister under the Public Governance, Performance and Accountability Act 2013.¹⁵

2.26 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. 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 four months after the end of the reporting period for the company.

2.27 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 2021–22 annual reports from issuance of auditor’s report

Source: ANAO analysis.

2.28 The analysis above shows that accountable authorities approved 48 per cent of annual reports within 10 days of the issue of the auditor’s report (2020–21: 55 per cent), 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 30 days (one more day than in 2020–21).

2.29 Twenty-two per cent of annual reports were tabled within 30 calendar days from the issue of the auditor’s report (compared to 29 per cent in 2020–21). The tabling of annual reports in Parliament occurred on average 44 days after the auditor’s report was issued (one day more than in 2020–21). There are 14 entities (eight per cent) that are required to table an annual report for 2021–22 which have not done so as at 2 December 2022.

2.30 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: 2021–22 annual report tabling date in relation to Budget estimates hearing as at 2 December 2022

Source: ANAO analysis

2.31 Figure 2.4 above shows that 86 per cent of annual reports were tabled on or before the 2021–22 estimates hearing dates unchanged compared to 86 per cent in 2020–21. There were six material entities across three portfolios which either tabled annual reports after the portfolio’s 2022–23 Budget estimates hearing (compared with eight material entities across six portfolios in 2020–21) or had not tabled as at 2 December 2022. Table 2.3 includes further details about those entities that did not provide 2021–22 annual reports prior to Budget estimate hearings.

Table 2.3: Annual reports tabled after the portfolio’s Budget estimates hearings for material entities, as at 2 December 2022

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 Budget estimates hearing.

Note c: The requirements for the tabling of the annual report for the High Court of Australia are outlined in subsection 47(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 of tabled annual reports.

Key audit matters

2.32 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 and has included KAM in reports since 2016–17. KAM have been reported in 2021–22 for the entities included in Auditor-General Report No. 32 Interim Report on Key Financial Controls of Major Entities (ANAO Report No. 32) and the Consolidated Financial Statements (CFS).

2.33 At the commencement of each financial statements audit, an assessment is made on the relevance of KAM for that year. In 2021–22, a total of 57 KAM were reported across 25 entities (2020–21: 57 KAM reported across 25 entities). Although the total number of KAM reported was the same with the prior year, three new KAM were added and three KAM were removed compared to the report in 2020 –21. The number of KAM per entity for 2021–22 ranged from one to five (consistent with 2020–21).

2.34 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. The majority of KAM in 2021–22 related to the valuation, allocation and accuracy assertion for assets and liabilities, including:

• advances, loans and other receivables, including accounting for concessional loans;
• non-financial assets including property, plant and equipment and specialist military equipment;
• investments;
• intangibles, including computer software;
• leases; and
• provisions, including defined benefit superannuation funds and personal benefits.

2.35 Other KAM included: completeness and accuracy of expenses relating to subsidies, personal benefits and other payments; and completeness and accuracy of revenue relating to taxation, royalty and other revenue arising from fees and charges. Further details of the KAM reported are included in the discussion of results of financial statements audits in Chapter 4.

Financial sustainability of material entities

2.36 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 point to an increased risk that an entity’s resourcing or functions are not sustainable.

2.37 In 2018–19, the Department of Finance (Finance) established a portal for centrally capturing publicly available corporate information for all Commonwealth entities.¹⁶ 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 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.

2.38 In September 2022 Finance published further general information on what each of the ratios measures and indicate.¹⁷ 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.¹⁸ 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 material entities.^{19 20} These parameters are described in Table 2.4 and Table 2.5 below.

Analysis of operating results

2.39 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.

2.40 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.²¹ As a result, any entity in this category averaging a large deficit should be considered more closely.

2.41 The ANAO analysed the operating results of all material entities over a five-year period from 2017–18 to 2021–22. The analysis is based on reported surpluses or deficits after adjusting for unfunded expenses, where relevant, highlighting the full cost of operations.²² Of the 62 material entities, 38 were not-for-profit and 24 were corporate or commonwealth companies or not-for-profit entities that have quasi-commercial operations or departmental functions operating on a for-profit basis.

2.42 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 below.

Table 2.4: Operating result category

Source: ANAO operating result categories.

2.43 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: Average operating results analysis

Source: ANAO analysis of material entities’ average operating results.

2.44 In 2021–22 there was a large average deficit recorded by 24 per cent of not-for-profit entities (compared to 21 per cent in 2020–21) and 29 per cent of for-profit/quasi-commercial entities (compared to 25 per cent in 2020–21). Forty-six per cent of not-for-profit entities and 50 per cent of material for-profit/quasi-commercial entities recorded a large average surplus (compared to 45 per cent and 71 per cent respectively in 2020–21). Thirty-two per cent of material not-for-profit entities recorded small average deficits or surpluses and managing within their breakeven mandate (compared to 34 per cent in 2020–21) while 21 per cent of material for-profit/quasi-commercial entities were classified as achieving small average deficits or surpluses (compared to four per cent in 2020–21).

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

Large average deficits

2.46 Seven for-profit/quasi-commercial entities recorded a large average deficit during the five year period. These large average deficits are attributable to the following factors:

• three entities recorded large average deficits, consistent with the previous financial years due to being in, or having been in, the build phase of large infrastructure projects and/or still in the process of increasing revenue. They were: Australian Naval Infrastructure Pty Ltd; National Intermodal Company Limited; and WSA Co Ltd²³;
• the National Housing Finance and Investment Corporation’s large average deficit is due to the accounting treatment for the recognition of concessional loan discount expense on loans advanced by the Corporation;
• 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.²⁴ These expenses are 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 in the Interstate and Hunter Valley network is a result of decreases in the expected net income on which the fair value is calculated. Impairment for the Inland Rail network reflects that ARTC will only recover a part of the economic benefits which are anticipated to arise from the full cost of construction of Inland Rail.²⁵;
• the Reserve Bank of Australia moved from the large average surplus to the large average deficit category in 2021–22, primarily due to net valuation losses of $46.0 billion incurred on the fair value measurement of domestic securities acquired as part of the bond purchase program (BPP) in response to the COVID-19 pandemic. These losses were partially offset by net interest income of $8.5 billion on securities holdings²⁶; and
• the Coal Mining Industry (Long Service Leave Funding) Corporation moved from the large average surplus to the large average deficit category in 2021–22 due to losses on its financial asset investments. The losses were primarily driven weaker performance of investments in listed and unlisted equities.

2.47 The following four not-for-profit entities recorded a large average deficit during the give year period, primarily attributable to factors that occurred in prior years that impact the five-year average to 2021–22:

• 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;
• the Australian Federal Police recorded deficits from 2017–18 to 2020–21 predominantly as 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 National Capital Authority recorded a deficit in 2017–18 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; and
• the National Library of Australia’s operating result in 2020–21 was impacted by a decrease of $165.9 million in the value of its 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.

2.48 Two not-for-profit entities recorded a large average deficit during the period due to factors occurring in current and prior years. Of these entities:

• the Department of the Prime Minister and Cabinet is in the large average deficit category as a result of the 2019–20 impact of AASB 16 Leases (AASB 16) as well as additional employee and supplier costs incurred in 2021–22 to implement new measures, including the Sydney Energy Forum and the National Strategy to Prevent and Respond to Child Sexual Abuse; and
• the Department of Veterans’ Affairs’ employee expenses have grown in 2021–22 due to an increase in staffing²⁷ and contractor costs to meet increasing demand for processing veteran claims since 2019–20.

2.49 Three not-for-profit entities moved from having a small average deficit or surplus in 2020–21 to a large average deficit in 2021–22. Of these entities:

• the Australian Bureau of Statistics’ operating results have been affected by the national census completed in 2021, with larger expenditure on employees and Software as a Service, due to the increased workload from survey development and roll-out, as well as costs incurred in analysing and reporting the information gathered during the census;
• the Australian Signals Directorate’s expenditure has increased since 2019–20 as part of the continued expansion of its operations and programs. The entity moved into the large average deficit category in 2021–22 attributable largely to the increase in deficits for 2020–21 and 2021–22 following additional expenditure of prior period appropriations for delayed projects impacted by the effects of supply chain delays; and
• in 2017–18, the National Blood Authority recorded a significant loss which has caused it to have a large average deficit during the period under review. This loss was driven by increased supplier costs that were incurred to: strengthen its cyber security following a data breach; ensure compliant and robust governance and management of contracted personnel; and deliver the BloodSTAR system project.

Large average surpluses

2.50 As illustrated in Figure 2.6, 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 (consistent with 2020–21). The following discussion focuses on the common drivers for these entities’ large average surpluses.

2.51 Thirteen material not-for-profit entities have remained in the large average surplus category for 2021–22. Of these entities:

• the operating results of the Australian War Memorial and National Gallery of Australia continue to be impacted by 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 and 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 period;
• the Australian Nuclear Science and Technology Organisation (ANSTO) gains recorded in 2021–22 attributable to the remeasurement of the nuclear waste management and decommissioning provisions (compared to losses recorded in 2020–21), which were mainly as a result of the impact of changes in the discounting factors applied in measuring the provisions due to changes in the Australian Government bond rate²⁸;
• the Australian Office of Financial Management (AOFM) remains in the large average surplus category in 2021–22. AOFM has received additional funding for the implementation and management of the Australian Business Securitisation Fund and the Structured Finance Support Fund.²⁹ The associated expenditure has been below budget due to lower investment activity in these funds;
• the Australian Securities and Investment Commission’s (ASIC) large average surplus is due to additional revenue recorded in 2021–22, including additional own source revenue received to deliver capital projects on behalf of other Australian Government entities and increased court cost recoveries.³⁰ ASIC also received $19.7 million more than budgeted from other government entities to fund the Modernising Business Registers and Global Switch Unit Exit programs in 2020–21. The additional funds were used to cover capital expenditure in each of these years;
• the Bureau of Meteorology continues to report a large average surplus mainly due to the impact of the Bureau’s contracts with customers which include the development of non-financial assets. Expenses for these assets are capitalised and not recorded in the operating result until they are depreciated over their useful lives. In addition, an insurance payment was received for cyclone damaged assets which was recorded in revenue, with the associated replacement asset purchases capitalised;
• the Commonwealth Scientific and Industrial Research Organisation (CSIRO) continues to recognise large surpluses due mainly to movements in the valuation of equity investments reflecting the underlying performance of the investments;
• the Department of Agriculture, Water and the Environment remains in the significant surplus category due mainly to gains from the remeasurement of the Antarctic restoration provisions.³¹ The gains on the Antarctic restoration provisions were mainly as a result of the impact of changes in the discounting factors applied in measuring the provisions due to changes in the Australian Government bond rate;
• the Department of Education, Skills and Employment (DESE) received significant revenue from government in previous years to assist in the delivery of the COVID-19 pandemic stimulus packages. This included school grants, university funding, increased funding for childcare payments to families and apprenticeship scheme payments including Jobactive. Funds were not fully expended in 2020–21 which resulted in a significant surplus in that year;
• the Department of Social Services (DSS) remains in the large average surplus category largely due to the recognition of resources received free of charge in 2018–19 for Aged Care Gateway IT systems application development services work completed by the Department of Health;
• 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 funding received for this program.³² The expenses for this program have not been fully realised since 2019–20. Geoscience Australia was first assessed as material by the Department of Finance in 2019–20 and the ANAO analysis includes three years of data;
• the large average surplus for the National Health and Medical Research Council primarily relates to decreases in expenditure due to reduced project-related activities resulting from the COVID-19 pandemic and the reversal of previously recognised impairment losses in 2020–21; and
• the primary drivers of Services Australia’s large average surplus were additional funding received to deliver the Government’s COVID-19 pandemic stimulus and disaster response initiatives in 2019–20 and 2020–21 and additional investment in transforming face-to-face service centres in 2021–22.

2.52 Four entities have moved from the small average deficit or surplus category in 2020–21 to the large average surplus category in 2021–22. Of these entities:

• the Australian Communications and Media Authority (ACMA) received additional funding in 2021–22 as part of new budget measures relating media sector support, women’s safety and a national strategy for prevention and response to child sexual abuse. A portion of this funding remains unspent due to delays in recruitment and the supply chain;
• the Department of Health has moved into the large average primarily due to the impact of the surplus recorded in 2017–18. The surplus was related to additional revenues in the form of inspections, applications, conformity assessment and evaluations in the Therapeutic Goods Administration and higher revenue from new chemicals assessments in the former National Industrial Chemicals Notification and Assessment Scheme;
• the Department of Infrastructure, Transport, Regional Development and Communications (DITRDC) has recorded improved operating results in the current and prior years which has contributed to its large average surplus. In 2021–22, DITRDC underspent by approximately $22.8 million on the Per- and Poly-Fluoroalkyl Substances program following a change to the implementation strategy; and
• the National Indigenous Australians Agency (NIAA) was first established on 1 July 2019 and has been assessed as a material entity since its inception. NIAA received additional funding from government in 2021–22 to coordinate its key activities, including policy development and program delivery. A portion of this funding remained unspent due to the temporary application resources to set up ICT systems used to support the Stolen Generation Redress Scheme.

Balance sheet analysis

2.53 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.

2.54 The ANAO analysed the balance sheet positions of material Australian Government entities as at 30 June 2022. While it is necessary to have regard to the public sector context, the following two measures are generally accepted indicators of the soundness of entities’ balance sheets and are consistent with the ratios published by Finance:

• Liquidity: the extent to which an entity’s liabilities are covered by cash or other financial assets. Where liabilities significantly exceed its financial assets, an entity may need a future injection of cash from government to meet those liabilities; and
• 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.

2.55 Based on the measures developed by Finance, the ANAO has reviewed an entity’s ability to manage its underlying financial position. As 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 prior years the ANAO has determined these parameters, outlined 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 material entities’ balance sheets.

2.56 Sixty per cent of material entities had strong balance sheets in 2021–22 (compared to 58 per cent in 2020–21), while 35 per cent had less strong balance sheets (compared to 34 per cent in 2020–21). The main driver for the movement to the strong balance sheet category was improvements to liquidity ratios stemming from increased financial asset values against decreasing liabilities balances. The following two entities improved from a weak balance sheet position in 2020–21:

• the Australian Bureau of Statistics, whose liquidity and gearing ratios improved due to reduced supplier expenditure after the completion of the 2021 Census and an increase in appropriations receivable from deferrals in user-funded surveys and lower capital expenditure; and
• Geoscience Australia, whose gearing ratio improved due to a larger appropriations receivable balance driven by an operating surplus of $50.2 million in the current year. The operating surplus was a result of delays in Geoscience Australia’s implementation and delivery of the ‘Satellite Based Augmentation’ system.

2.57 Five per cent of material entities had weak balance sheets in 2021–22 (compared to 8 per cent in 2020–21). 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 risk of experiencing liquidity problems. Entities with weak balance sheets in 2021–22 include:

• the Australian Taxation Office (ATO) and Department of Social Services (DSS) — consistent with prior years, both entities continue to have weak balance sheets, largely driven by the impact of the implementation of AASB 16 in 2019–20. 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, including loans and bonds, incurred during the construction and early phases of operation of the national broadband network.

Audit findings

2.58 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.

Table 2.6: Audit findings rating scale

Source: ANAO reporting policy.

2.59 A summary of findings identified for the period ended 30 June 2022 by category is presented in Table 2.7.

Table 2.7: Audit findings by category for the period ended 30 June 2022

Source: ANAO compilation of findings.

Financial statements preparation

2.60 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 2018–19 to 2021–22

Source: ANAO data.

2.61 There are no significant or moderate findings for financial statements preparation for 2021–22. There were nine minor findings reported in this category, four were first reported in 2021–22 and five remain unresolved from prior years. The minor findings relate to quality review processes and preparation of position papers to support accounting positions, judgements and estimates in the financial statements.

Information Technology control environment

2.62 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.

2.63 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 2018–19 to 2021–22

Source: ANAO data.

2.64 Ten new moderate findings were reported during 2021–22.³³ Nine moderate findings remain unresolved from prior years³⁴, one of these related to 2019–20.

2.65 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. Fifteen of the moderate findings relate to weaknesses in user access management with seven pertaining to management of terminated user access.³⁵ Refer to paragraph 2.98 for further analysis of weaknesses identified in terminated user access controls.

2.66 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 Manual³⁶ requires that privileged user access be appropriately restricted and when provided, that the access is logged, regularly reviewed and monitored. There were three moderate and eight minor findings reported relating to privileged user access. Forty-three of the 64 minor findings were raised in 2021–22 and 21 were raised in prior years.

2.67 IT security management continues to remain the most common area of weakness in the IT control environment, with over 87 per cent of findings, and almost 95 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

2.68 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 2018–19 to 2021–22

Source: ANAO data.

2.69 There were no moderate findings reported during 2021–22 related to assurance over administered programs. Seven of the eight minor findings were raised in 2021–22 and one was raised in 2020–21.

Accounting and control of non-financial assets

2.70 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 computer software.

Figure 2.10: Accounting and control of non-financial asset audit findings 2018–19 to 2021–22

Source: ANAO data.

2.71 The significant finding reported in 2020–21 related to the valuation of the Department of Defence’s Specialised Military Equipment (SME) using the cost attribution model has been downgraded during 2021–22.³⁷

2.72 In addition to the finding downgraded to a moderate, there were a further three new moderate findings reported to entities in 2021–22. The new moderate findings related to: weaknesses in the disposal of assets and inventory; impairment of administered inventory; and lease management.³⁸

2.73 Seven of the 15 minor findings were raised in the 2021–22 period. There were eight 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;
• stocktake procedures; and
• timeliness of capitalisations.

Revenue, receivables and cash management

2.74 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 audit findings 2018–19 to 2021–22

Source: ANAO data.

2.75 There was one new moderate finding reported to the Australian Taxation Office relating to debt management during 2021–22.³⁹

2.76 There were six new minor findings reported in 2021–22. Four of the 10 findings remain unresolved and were first reported in 2020–21.

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

• timeliness and completeness of reconciliations;
• weaknesses in processes underpinning the estimation of receivable balances within the financial statements including the accuracy and completeness of the data supporting these estimates;
• management of concessional loans.

2.78 The five 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 of bank accounts; and
• weaknesses relating to the management of credit card acquittals.

Human resource financial processes

2.79 Human resources encompass the management and administration of employee entitlements and payroll functions. Employee benefits represent the most significant departmental expenditure for most entities, and the associated leave and superannuation liabilities are subject to estimates and judgements in inputs.

2.80 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 2018–19 to 2021–22

Source: ANAO data.

2.81 The unresolved moderate finding was reported in 2018–19 to the Northern Land Council related to weaknesses in the management of staff leave and controls in payroll processes.⁴⁰

2.82 Three of the eight minor findings were raised in 2021–22. Five minor findings remain unresolved from prior years and one of these findings has been unresolved since 2015–16. The findings in this category relate to weaknesses in:

• management of employee leave entitlements;
• maintenance of payroll records and controls; and
• management of superannuation entitlements.

2.83 Five of the nine findings identified by the ANAO in 2021–22 related to the management of employee leave balances and/or compliance with relevant legislative or other requirements underpinning leave entitlements. These findings are consistent with those reported through the Auditor-General Report No. 46 2021–22 Management of Staff Leave in the Australian Public Service.⁴¹ The audit identified a number of instances of good practice that may be relevant for other entities to consider in their administration of employee leave entitlements.

Purchases and payables management

2.84 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 2018–19 to 2021–22

Source: ANAO data.

2.85 One significant finding was reported 2021–22 to the Department of Veterans’ Affairs in relation to the methodology supporting the valuation of the military compensation provision reported in the financial statements.⁴²

2.86 There was one unresolved moderate finding first reported in 2020–21 relating to weaknesses in the governance of Australian Defence Force health services at the Department of Defence.⁴³

2.87 Seven minor audit findings were raised in 2021–22. Common weaknesses in this category over the four-year period between 2018–19 and 2021–22 relate to:

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

Other audit findings

2.88 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 2018–19 to 2021–22

Source: ANAO data.

2.89 There was one new moderate finding identified in 2021–22 reported to the Royal Australian Air Force Veterans’ Residences Trust Fund in relation to governance risks arising from the entity’s audit committee not being composed of members independent of the entity.⁴⁴

2.90 Seven of the eleven minor audit findings were raised in 2021–22. Four minor findings remain unresolved and were raised in 2020–21. 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;
• grant program processing and management; and
• fraud risk assessments and reporting of fraud to those charged with governance.

Legislative compliance

2.91 In accordance with ANAO policy, significant legislative breaches are reported to Parliament consistent with the reporting of significant and moderate audit findings. 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 2018–19 to 2021–22.

Figure 2.15: Significant legislative breaches 2018–19 to 2021–22^a

Note a: For the purpose of this analysis L2 and L3 categories have been grouped together as non-significant breaches. This includes all legislative findings reported during the year including one significant and three moderate audit findings which were reported as resolved at 30 June 2022.

Source: ANAO data.

2.92 There were three significant legislative breaches reported during 2021–22. Two of the breaches were raised during the 2021–22 and one remained unresolved from prior years. The new significant breaches identified relate to:

• the Australian Financial Security Authority. The breach identified related a transfer of funds that resulted in the overdrawing of a special account and a breach of section 83 of the Constitution. A transfer reversing the incorrect amount was processed on the same day; and
• the Royal Australian Air Force Welfare Recreational Company. During the 2021–22 audit, the ANAO identified that the entity had made changes to its audited 2020–21 financial statements and had published an altered version of the financial statements which included significant changes from the version audited by the ANAO. The changes to the financial statements are a breach of section 97 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and section 301 of the Corporations Act 2001.⁴⁵

2.93 The unresolved significant legislative 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 legislative 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.⁴⁶

2.94 There were 10 new non-significant breaches reported during 2021–22. Two non-significant breaches remain unresolved 2020–21. The non-significant breaches related to:

• non compliance with determinations made by the Remuneration Tribunal for remuneration of key management personnel (incorrect payments);
• transactions not appropriately recorded in special accounts;
• non compliance with requirements for independent audit committee membership required by section 17 of the PGPA Act; and
• breaches of section 23 of the PGPA Act relating to approval for purchases.

2.95 The appropriateness of governance of key management personnel remuneration has been a continued focus of the ANAO’s audits. Across the period 2018–19 to 2021–22 the ANAO has continued to identify a mix of significant and non-significant legislative breaches relating to key management personnel remuneration. Six of the twelve non-significant breaches in 2021–22 relate to incorrect payments of remuneration to key management personnel and/or non-compliance with determinations made by the Remuneration Tribunal.

Protective Security Policy Framework

2.96 The Attorney–General’s Department (AGD) updated the Protective Security Policy Framework (PSPF) Policy 10 Safeguarding data from cyber threats (Policy 10) in March 2022 to require non-corporate Commonwealth entities (NCEs) to implement the Australian Signals Directorate’s Australian Cyber Security Centre (ACSC) Essential Eight cyber mitigation strategies. The AGD updates were an expansion of the previous Policy 10 requirements which had required NCEs to implement four of the ACSC Essential Eight cyber mitigation strategies and to consider other mitigation strategies specified in ACSC’s Strategies to Mitigate Cyber Security Incidents. The updates to Policy 10 were made on the advice of ACSC based on its assessment of cyber threats. The updated Policy 10 requirements became effective on 1 July 2022.

2.97 ACSC updated its guidance on the implementation of the Essential Eight by introducing four maturity levels (Maturity Level Zero through to Maturity Level Three). With the exception of Maturity Level Zero, the maturity levels are based on mitigating increasing levels of adversary tradecraft, which includes different tools, tactics, techniques and procedures, and range of focus of adversaries. NCEs are required to implement each of the Essential Eight strategies at a minimum of Maturity Level Two to meet the minimum requirements established under the new PSPF maturity model.

Removal of user access

2.98 The ACSC has reported an increase in the number and sophistication of cyber threats.⁴⁷ Threats to the confidentiality and integrity of data held by entities means that entities need to enforce effective access control to systems and networks, and ensure the timely removal of systems access following a user’s cessation with the entity.

2.99 The 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.

2.100 The ANAO has identified and reported previously⁴⁸ that several government entities have not implemented effective controls relating to the timely removal of user access. As stated in the PSPF: ‘Effectively managing personnel security includes ensuring departing personnel fulfil their obligations to safeguard Australian Government resources; this limits the potential for the integrity, availability, and confidentiality of those resource to be compromised’.⁴⁹ This highlights a potential security threat to systems and information across all government entities.

2.101 The ANAO assessed termination controls in place at 144 relevant⁵⁰ government entities and found that 53 entities do not have a policy encompassing user access removal or that define the timeframe access should be removed from systems following a user’s departure from the entity. A lack of policies related to user access removal increases the risk that access will not be removed in a timely manner and may be inappropriately used to access information.

2.102 The ISM states ‘Removing or suspending access to systems, applications and data repositories can prevent them from being accessed when there is no longer a legitimate business requirement for their user, such as when personnel change duties, leave an organisation or are detected undertaking malicious activities’.⁵¹ Timely removal of access is an important control to prevent unauthorised access to government systems and data. Five entities have a timeframe of greater than thirty days to remove user access to government systems.

2.103 Of the entities reviewed, 35 entities do not allow for the HR systems to enter terminations after cessation. This was either due to system restrictions, or an assessment by the entity that it does not require backdated cessations as all users are identified and actioned on their last working day. However, should a user separation certificate not be completed prior to cessation, the system would reflect an incorrect date. Not allowing backdated terminations prevents an entity from monitoring these cases, can result in incorrect records and removes an entity’s ability to monitor inappropriate access.

2.104 The majority of entities assessed, 119 entities of 144 relevant entities, do not have an effective control to monitor access or activity in entities systems after user cessation. Of these 144 entities, 14 entities currently have an open finding relating to terminations including seven⁵² which have been assessed as a moderate risk. Not reviewing the access of individuals means entities are unable to assess and remediate any impact from unauthorised access to systems. This increases the risk that access to systems post termination is not detected and inappropriate activities undertaken are not mitigated.

2.105 The AGD collects information on entities self-assessed level of maturity for the of PSPF. As at 30 June 2021, 80% the 97 non-corporate commonwealth entities assessed themselves as being fully effective or higher at removing access ‘On separation or transfer, the entity removed personnel’s access to Australian Government resources, including physical facilities and ICT systems.’⁵³ ANAO’s observations around termination controls indicates entities may be over estimating the effectiveness of the control environment, this is consistent with findings in previous ANAO audits undertaken on entities’ cyber security.

2.106 The weaknesses identified by the ANAO pose an increased risk of unauthorised access to systems and data. Entities should review the management of these areas, and implement the appropriate controls included in the PSPF and ISM to mitigate the risks.

Executive remuneration

2.107 The Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 establishes the requirement that entities must comply with the requirements of AASB 124 Related Party Disclosures (AASB 124) when preparing their financial statements. As a result, entities must establish accounting policies and processes to identify key management personnel (KMP) and report the total remuneration paid to KMP during the financial year in the notes to the financial statements.

2.108 The Public Governance, Performance and Accountability Rule 2014 (PGPA Rule) requires non-corporate and corporate Commonwealth entities to include further disclosures on executive remuneration in their annual reports for three staffing categories: key management personnel (KMP); senior executives and other highly paid staff. Commonwealth companies are only required to include information in relation to KMP.

2.109 In addition to the requirements of the PGPA Rule, the Department of Finance has issued two RMGs that provide additional guidance for entities in preparing their annual reports.⁵⁴ The PGPA Rule and guidance provide a definition of each category of executive for which remuneration must be reported in the annual report as outlined below:

Under AASB 124, KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity;

Senior executives are officials of a Commonwealth entity who are any of the following and who are not KMP:

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

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

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

Other highly paid staff are officials of a Commonwealth entity:

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

(b) whose total remuneration exceeds the threshold remuneration amount for the reporting period.^{55 56}

2.110 The ANAO audits the KMP remuneration note in the financial statements but is not responsible for auditing or providing assurance over the disclosure of executive remuneration in the annual report.

2.111 As noted in paragraph 2.95, since 2018–19 the ANAO has continued to identify a mix of significant and non-significant legislative breaches relating to key management personnel remuneration, particularly in relation to overpayments and non-compliance with Remuneration Tribunal determinations. During 2021–22 the ANAO has identified a further five non-significant legislative breaches related to KMP remuneration. The cumulative nature of the ANAO’s audit findings during this period highlights the importance of entities establishing appropriate policies, procedures and payroll controls that prevent overpayments from occurring and promote compliance with the relevant legislative requirements. The appropriate governance of KMP remuneration by entities will continue to be a focus of the ANAO’s financial statements audits.

2.112 The ANAO has performed a review of entity annual reports to confirm whether the disclosure of executive remuneration reported in annual reports is consistent with the requirements of the PGPA Rule and the audited financial statements. There are a number of entities for which the ANAO performs financial statements audits which are not required to report executive remuneration in an annual report. These include:

• 61 subsidiaries of corporate Commonwealth entities and Commonwealth companies, which are not required to prepare an annual report;
• the Australian National Preventive Health Agency, which does not prepare an annual report;
• four entities where KMP are engaged in an honorary capacity and, as a result, disclosures are not required by the PGPA Rule⁵⁷; and
• the High Court of Australia which is not subject to the PGPA Act.

2.113 Excluding the above entities, there were 180 entities which are required to apply executive remuneration reporting framework established by the PGPA Rule. These entities include: 15 Commonwealth companies; 69 corporate Commonwealth entities; and 96 non-corporate Commonwealth entities. The analysis below does not include four entities which had not provided the ANAO a copy of the annual report as at 2 December 2022⁵⁸ and two entities that do not publish an annual report.⁵⁹

2.114 The ANAO undertook an analysis on the total number of KMP positions which have been identified by entities. An overview of the range and average number of KMP identified by these entities in their 2021–22 financial statements has been included in Table 2.8 below.

Table 2.8: Average number and range of KMP

Source: ANAO analysis of entity financial statements.

2.115 Differences between the composition of corporate and non-corporate entity KMP positions primarily relate to the model of governance, with corporate Commonwealth entities and Commonwealth companies including appointed boards of directors in the definition of KMP.

2.116 The ANAO identified that five entities amended their accounting policy/and or definition of who is considered to be a KMP during 2021–22. Four of these entities reported additional KMP positions and one entity reported a reduced number of KMP positions. An overview of these entities, and the corresponding movement in KMP positions reported, has been listed in Table 2.9 below.

Table 2.9: Movements in KMP positions reported for 2021–22

Source: ANAO analysis

2.117 The ANAO performed a review of the disclosures in entity annual reports compared to the audited financial statements and identified eight instances where there were variances⁶⁰ in the total remuneration disclosed. Of the eight entities:

• five disclosed the reason for the difference in their annual report; and
• three did not disclose the difference in the annual report. These entities are: the Australian Securities and Investments Commission; Grains Research and Development Corporation; and WSA Co Limited.

2.118 Section 17CA of the PGPA Rule requires entities to disclose in their annual report numerical information on the remuneration paid to KMP, senior executives and other highly paid staff. This includes a breakdown of: names (for KMP only), base salary, bonuses, other benefits and allowances, superannuation contributions, long service, other long term benefits and termination benefits. Whilst not subject to the detailed audit procedures by the ANAO, our analysis indicated that all entities had included the required tables and numerical information in annual reports as required by the PGPA Rule.

2.119 The PGPA Rule also requires entities to disclose policies and practices covering executive remuneration, including governance arrangements under which these policies and practices operate and the basis for determining remuneration.⁶¹ The ANAO identified that 170 of the 180 entities assessed included the information required by the PGPA Rule. Ten entities did not include all of the information required by the PGPA Rule. Of these entities:

• five entities’ disclosures on the basis for determining executive remuneration did not include detail on the framework, policies and governance associated with remuneration.⁶² These entities were: the Australian Sports Commission; Food Standards Australia New Zealand; Indigenous Business Australia; National Australia Day Council; and the National Indigenous Australians Agency;
• the Australian Institute of Family Studies and Australian Strategic Policy Institute Limited’s disclosures on executive remuneration policies and practices lacked appropriate detail⁶³;
• Creative Partnerships Australia Limited and the National Recovery and Resilience Agency’s annual reports did not include any information on executive remuneration policies and practices⁶⁴; and
• the Australian National Maritime Museum’s annual report did not cover the remuneration policies and practices for all executives.⁶⁵

2.120 The ANAO performed a review of the information included in the annual reports of entities which did include the remuneration information required by the PGPA Rule. Entities are permitted to choose the level of disaggregation for these disclosures⁶⁶, noting that Commonwealth companies are only required to disclose governance arrangements for KMP. The analysis indicates that there is not a consistent approach to disclosing the level of detail for remuneration information for KMP, senior executives and other highly paid staff with entities adopting a mix of the permitted disaggregation in preparing their annual report. Figure 2.16 and Figure 2.17 summarise the level of disaggregation adopted by corporate and non-corporate Commonwealth entities.

Figure 2.16: Disclosures of governance arrangements — corporate Commonwealth entities

Source: ANAO analysis of corporate Commonwealth entity 2021–22 annual reports.

Figure 2.17: Disclosures of governance arrangements — non-corporate Commonwealth entities

Source: ANAO analysis of non-corporate Commonwealth entity 2021–22 annual reports

Bonuses

2.121 On 13 August 2021, the Australian Public Service Commission (APSC) released its Performance Bonus Guidance (the Guidance) which established revised principles governing the application and payment of performance bonuses for Commonwealth entities and companies.⁶⁷ The Guidance included the expectation from the Australian Government that entities should implement the principles as ‘soon as practicable’.⁶⁸ All Commonwealth entities and companies were expected to apply the Guidance for performance bonuses relating to activities in 2021–22 onwards with the exception of:

• 61 subsidiaries of corporate Commonwealth entities and companies; and
• the High Court of Australia (which is not subject to the provisions of the PGPA Act).

2.122 The scope of the Guidance extended to performance bonuses defined as ‘an at-risk short-term incentive, variable remuneration, and one-off non-monetary and monetary payments, which are provided based on performance’. This definition also includes non-remunerative gifts or incentives.

2.123 For the entities to which the Guidance was applicable, it did not apply to the following staff:

• members of the Australian Defence Force;
• positions where remuneration arrangements are set by the Remuneration Tribunal; ⁶⁹ or
• where applying the Guidance would be inconsistent with an entity’s legislative and/or regulatory obligations.⁷⁰

2.124 The Guidance established the following principles⁷¹:

• any performance bonuses must be carefully designed to clearly align with delivering a public benefit over and above expected outcome;
• all Commonwealth entities and companies have a responsibility to the Australian public and therefore should act in line with community expectations regarding remuneration, regardless of their level of independence from the government;
• performance bonuses may only be used in limited circumstances, justifiable to the Parliament and the public; and
• Commonwealth entities and companies should exercise rigour and restraint in the use of performance bonus payments.

2.125 Other than allowing existing performance bonus arrangements to expire, the Guidance indicated that entities may choose to cease performance bonuses by partially rolling performance bonuses into salaries⁷² or settling performance bonuses through a buy-out.^{73 74} Where bonuses are rolled into salary the Guidance indicated that only a portion of the available bonus should be rolled in.⁷⁵

2.126 As noted at paragraph 2.123 staff members who are remunerated in accordance with a determination of the Remuneration Tribunal are not subject to the principles of the Guidance. As a result, there are a range of officeholders, including Principal Executive Officers, for which the conditions of the relevant determination/s made by the Remuneration Tribunal permit the payment of performance bonuses as part of a remuneration package. Ongoing payment of these bonuses has not been considered in the ANAO’s analysis below.

2.127 The ANAO performed an analysis of the application of the principles in the Guidance during 2021–22 through inspection of entity annual reports and inquiries of entities as part of the financial statement audit process. Prior to the release of the guidance, there were 46 Commonwealth entities and companies that paid performance bonuses to staff. Following the release of the Guidance, 22 entities have made the decision to cease paying performance bonuses (during 2021–22 or in future periods). The strategies adopted by these entities in ceasing performance bonuses have been described in Table 2.10 below.

Table 2.10: Entities which ceased the payment of performance bonuses

Source: ANAO analysis.

2.128 The Guidance recognised that “a limited number of Commonwealth entities and companies operate primarily in commercial markets where it may be more appropriate to use performance bonuses”⁷⁶ and establishes principles for their use. The Guidance indicated that:

• bonuses would “not be appropriate in most policy, service delivery, regulatory, or corporate roles.”⁷⁷ ; and
• there may be a “greater justification for Commonwealth entities and companies whose primary purpose is to operate in commercial markets, to use at risk remuneration arrangements including performance bonuses”.⁷⁸

2.129 The Guidance states that entities must: have a bonus policy in place that is reviewed annually; and disclose executive remuneration policies and practices, including those which relate to performance bonuses, in their annual report.⁷⁹

2.130 Twenty-four of the 46 entities for which the Guidance applied who previously paid performance bonuses intend to continue paying performance bonuses. These entities are listed in Table 2.11 below. The ANAO’s analysis of these 24 entities identified that:

• four entities do not have a policy relating to performance bonuses. These entities are: Australian Strategic Policy Institute Limited; Commonwealth Grants Commission and the Commonwealth Scientific and Industrial Research Organisation and the Professional Services Review; and
• of the 20 entities that have a policy in place, four did not include information on the policy in the 2021–22 annual report. These entities are: Australian Hearing Services; Australian National University; Australian Signals Directorate; and the Department of Foreign Affairs and Trade.

Table 2.11: Entities continuing to pay performance bonuses

Note a: Fee earning lawyers (with exceptions) and previous fee earners who are now pro bono replacements (meeting certain requirements).

Note b: Leaders, Community Hearing Advisors, Clinicians, Network Support Employees, Enabling Services Office team members, Hearing Centre teams members and NAL Network team members.

Note c: CSIRO Canberra Deep Space Communication Complex (CDSCC) Enterprise Agreement 2018–2021.

Note d: Staff who are at the top pay point of their payroll band as specified in the Enterprise Agreement.

Note e: National Intermodal Corporation Limited do not offer bonuses for new staff not involved in project delivery or working as part of the senior leadership team following the release of the Guidance.

Note f: The Professional Services Review has removed the payment of bonuses for all staff except for one existing employee who has a contractual arrangement that allows the payment of a performance bonus.

Note g: Payment of commissions or bonuses is dependent on the achievement of pre-determined results/criteria.

Source: ANAO analysis.

Related parties

2.131 AASB 124 requires entities to make specific disclosures of transactions with related parties in the notes to the financial statements. AASB 124 provides that a related party ‘is a person or entity that is related to the entity that is preparing its financial statements’.⁸⁰ This includes individuals or close members of their family that:

• have control or joint control of the entity;
• have a significant influence over the entity; or
• are member of the KMP of an entity.⁸¹

2.132 The purpose of related party disclosures is to ensure entities draw attention to the possibility that their financial statements may have been affected by the existence of related parties and by transactions with such parties. For Commonwealth entities and companies, portfolio Ministers and members of the Cabinet are considered to be related parties.⁸² When preparing financial statements, entities must give consideration to whether any transactions have arisen with Cabinet or other ministers.

2.133 Potential related party transactions can include the purchase or sale of goods and services to the entity, grants and other transfer payments, provision of guarantees or collateral or settlement of liabilities on behalf of a related party. Given the nature of the programs and administered by the Australian Government individuals, including Ministers, may transact with entities, for example, in the areas of social security, health benefits or taxation. These transactions are referred to as ‘common citizen transactions’ and are not generally considered to be related party transactions for which disclosure is required in the financial statements.

2.134 The ANAO’s analysis of entity financial statements and the Australian Government Consolidated Financial Statements indicated that were no related party transactions with Ministers reported during 2021–22. There were a number of Cabinet and Ministerial changes during 2021–22, including the swearing in of a new Australian Government. Given these changes entities were required to give consideration to understanding the impact on the process for determining the existence of and reporting on any related party transactions in preparing their financial statements.

2.135 To assist entities in obtaining evidence as to the existence of any related party transactions that may require disclosure in the financial statements, the Department of Finance (Finance) conducts a biannual data collection process for all Ministers. The purpose of the data collection process is to obtain a confirmation as to whether each Minister is aware of whether they, a closely related family member or controlled entity has transacted with entities (outside of the ‘common citizen transactions’).

2.136 Finance provides advice to the Government on the collection and identification of information required for accounting purposes. The Government requests that ministers complete a signed declaration form and, where their responses to questions in the declaration note the existence of related party transactions, to provide the details of these transactions using the table included in the declaration. Finance then reviews this information and provide letters of assurance to entities that includes details of any transactions that requiring disclosure in the entities’ financial statements. The data collection process was completed for all ministers who served during 2021–22. The supporting records were made available to the ANAO for the purpose of conducting financial statements audits.

2.137 The ANAO has analysed the policies and procedures that entities have undertaken in preparing the related party disclosures in their financial statements. The ANAO identified that of the 247 entities prepared financial statements 115 (47 per cent) did not have documented policies and/or procedures to identify related party transactions.

2.138 Entities should implement formal accounting policies, risk assessments and procedures related to the identification of related party transactions in the preparation of their annual financial statements.

2.139 Australian Auditing Standard ASA 550 Related Parties requires auditors perform specific audit procedures in relation to the identification, disclosure and impact of related party relationships and transactions. The ANAO performed these procedures as part of 2021–22 financial statements audits.

Shared services

2.140 Entities may enter a shared service arrangement for the delivery of corporate support services such as human resources (HR), information technology, financial and payment processing. The Department of Finance has led the initiative to broaden shared services uptake and is setting expectations for entities to progress to shared services as the Shared Services Program is a Whole of Australian Government Initiative and long-term priority for the Australian Government. This has resulted in an increase in shared services arrangements across government entities.

2.141 The Auditor-General Audit Insights Report Service delivery through other entities 2022⁸³ reviewed performance audits that examined aspects of service delivery through other entities undertaken in 2019–20 and 2020–21 and provided three key learning areas:

• establishing appropriate service delivery governance arrangements
• understanding risk tolerances and managing service delivery risks; and
• establishing performance monitoring and measurement arrangements.

2.142 The implementation of shared services across the public sector requires entities to work together to create and implement robust service agreements. Service agreements should capture risks for both entities, incorporate and report on meaningful performance measurements, and require reviews of the agreement to assess whether services provided are relevant, efficient and effective.

2.143 The ANAO has reviewed the governance arrangements, performance reporting, risk assessment and assurance arrangements which have been implemented for all Commonwealth entities and companies who provided or received shared services during 2021–22.

Providers

Governance Arrangements

2.144 A critical factor in arrangements where service delivery is through another Australian Government entity is accountability. Effective agreements can limit ambiguity in terms of roles and responsibilities, establish clear governance arrangements and expectations of the operation of controls and outline the agreed reporting on these arrangements. The degree of work undertaken to manage and maintain shared services agreements may differ depending on the nature and complexity of the services being provided. Entities that provide services to a small number of entities may not have the same governance frameworks as those that provide to a large number of entities. There were 19 government entities that provided shared services arrangements to other government entities as at 30 June 2022.⁸⁴

2.145 All entities had a governance board, committee or other bodies that was responsible for the oversight of the services provided. Eight entities had boards, seven had committees and four entities had other bodies such as the CFO or financial reporting teams providing oversight of the function. Two of the 19 entities’ responsible governance bodies did not have oversight over budget expenditure and strategic priorities nor receive regular reporting on the delivery of shared services.⁸⁵

2.146 All shared services arrangements were underpinned by a formal agreement that clearly documented the roles and responsibilities of the provider and receiving entities. All entities had key decisions and strategies relating to delivery of services by the entities ratified by the governance board, committee, or other bodies.

2.147 Five of the 19 entities did not have a comprehensive policy relating to shared services provided that had been endorsed at the executive level.⁸⁶

Understanding risk tolerances and managing service delivery risks - Providers

2.148 When services are delivered by another entity, risks to service delivery should be managed proactively in an ongoing manner by both entities, to enable each entity to effectively discharge its responsibilities. The Commonwealth Risk Management Policy states that ‘entities must implement arrangements to understand and contribute to the management of shared risks’.⁸⁷

2.149 Five of the 19 entities did not have risk assessments undertaken for the services provided.⁸⁸ Table 2.12 shows the timeframes of review undertaken for risk assessments for services provided under shared services agreements.

Table 2.12: Timeframes of review for risk assessments for services

Source: ANAO analysis

Establishing performance monitoring and reporting arrangements - Providers

2.150 Performance measurement and reporting arrangements are two of the fundamental elements of a service agreement. Performance measures may be set out in the provider’s internal service standards or may be written into the formal agreement between the entities. Regular reporting on service delivery by the provider entity allows the receiving to monitor the effectiveness and efficiency of the delivery of services.

2.151 There were three entities that did not have an assurance framework over services provided under its shared services arrangements.⁸⁹ Two of the 19 entities do not have a reporting process to inform receivers of shared services of the results of internal and external audits or reviews of the service provider.⁹⁰

2.152 One of the 19 entities did not provide formal certification on the effectiveness of controls to the receivers of the services.⁹¹ Seventeen entities provided letter of assurances, and one entity provided other forms of formal certification. The level of assurance provided varied ranging from management sign-offs without supporting evidence to representation letters with details of one or more of the following: an overview of internal controls, audit and assurance activities conducted, compliance reports, reporting of deficiencies if applicable and quality of serviced delivered under agreements.

2.153 The ANAO’s review of the shared services delivery arrangements demonstrates improvements can be made in areas concerning policy, monitoring and reporting, and risk assessments. The changes in entity’s operating environment and complexities of financial reporting frameworks requires risk assessment processes to be robust, reviewed, and comprehensive to identify and assess the evolving risks.

Receivers

Governance Arrangements

2.154 Accountability and strong governance arrangements are equally critical for entities receiving shared services as the services underpin the effective operations of the entity. The work undertaken to engage, assess, implement and monitor shared services arrangements may differ depending on the level of complexity and range of services being provided. The review of entities receiving shared services arrangements identified smaller entities did not have, and may not have required, the same governance arrangements due to the size of the agency or nature of services being received.

2.155 There were 60 entities that received shared services arrangements in the 2021–22 financial year⁹² who received a total of 154 distinct services.

2.156 All entities entered into a formal agreement with the service provider. The term of the agreements varied from fixed terms to indefinite with 65 per cent of agreements being ongoing until terminated. It is important that where agreements remain in place until otherwise terminated that entities undertake a regular review of the services received and performance of the service organisation.

2.157 Entities can receive more than one type of service with providers of shared services offering a range of services. The largest category of shared services received related to the provision of IT networks and support services which were generally available as a suite of services. This included provision of network level systems and platforms, IT support services, and application management and provision including Human Resources Management Information System (HRIMS) and Financial Management Information software (FMIS). This was followed by financial processing services such as accounts receivable, accounts payable and payments for administered programs. Figure 2.18 provides further details on the categories of services being received by entities.

Figure 2.18: Categories and number of services provided

Source: ANAO analysis 2021–22

Understanding risk tolerances and managing service delivery risks - Receivers

2.158 As receivers of shared services arrangements, understanding and managing service delivery risks is essential to ensure mutual understanding with entities that provide those services. Forty-three per cent of entities that receive shared services did not undertake a risk assessment for the services received. Furthermore, 53 per cent entities did not perform a risk assessment over the use of the service organisation. Table 2.13 shows the period risk assessment was last undertaken for the use of a service organisation by entities that receive shared services.

Table 2.13: Period risk assessment last reviewed for use of services organisation

Source: ANAO analysis

Establishing performance monitoring and reporting arrangements - Receivers

2.159 Performance measurement and reporting arrangements allows entities that receive shared services arrangements to monitor the effectiveness and efficiency of the services being received.

2.160 Twelve per cent of entities did not have processes to monitor the work performed by the service provider. Forty-three per cent of the entities did not have an assurance framework over services received under its shared services arrangements.

2.161 Finance provides guidance in RMG 125 Commonwealth Entities Financial Statements Guide that entities should consider when receiving shared services and preparing their financial statements.⁹³

2.162 Similar to the providers of shared services arrangements, the review of the service delivery arrangements demonstrates improvements can be made in areas concerning monitoring and reporting, and risk assessments for the receivers of shared services arrangements. The level of complexity required for each arrangement may differ however the receiving entities remain responsible for monitoring the quality of the services received to ensure they meet the requirements under financial and legislative frameworks.

Intangible assets – computer software

2.163 The Australian Government’s intangible assets comprise mainly internally developed or purchased computer software. As reported in the Consolidated Financial Statements at 30 June 2022, the gross book value of computer software recognised by entities totalled $21.1 billion. As noted in Chapter 1, during the period 2017–18 to 2021–22 there has a $6.1 billion increase in capitalised computer software reported by entities during this period.

2.164 In 2018 the Australian Government launched a strategy to improve digital services which has been periodically updated. The 2021 Digital Government Strategy articulates the Australian Government’s vision that ‘by 2025, Australian will be one of the top three digital governments in the world, for the benefit of all Australians and will have the foundations to retain this position into the future’.⁹⁴ The strategy articulates that by 2025 all Australian Government services should be available digitally and should focus on the ability to develop software and platforms that are available to be reused across government and designed with a common architecture.⁹⁵ The achievement of this vision will require entities to continue to invest in the development of computer software.

2.165 Computer software developed by Commonwealth entities is often unique to the Australian Government and related to the regulatory or service delivery function conducted by those entities, for example, social security benefits, health benefits, trade facilitation and taxation administration. In 2021–22 the ANAO identified 12 material Commonwealth entities and companies where accounting for intangible assets is considered a moderate or significant area of audit focus.⁹⁶

2.166 AASB 138 Intangible Assets (AASB 138) provides the criteria for the identification, recognition, and measurement of intangible assets including computer software. AASB 138 contains detailed guidance on the type and nature of costs incurred in development or purchase of computer software that can be capitalised as intangible assets by entities.

2.167 The International Financial Reporting Standards (IFRS) Interpretations Committee recently issued two agenda decisions that provided interpretations on accounting for software as a service (SaaS) contracts (cloud computing).⁹⁷ The Committee identified that in respect of SaaS contracts these arrangements are not considered to be intangible assets where the customer does not control the software application and are often only service contracts that should be expensed.

2.168 Finance has developed Resource Management Guide RMG 109 Accounting for Internally Developed Software and Cloud Computing Arrangements to provide guidance to entities in accounting for these arrangements.⁹⁸ The complexity of the accounting arrangements and the technology and computer software developed by entities required the application of increased professional judgement in accounting for these arrangements in an entity’s financial statements. It is important for entities to establish accounting policies, processes for capturing capital costs and quality assurance processes which regularly review intangible asset balances for impairment.

2.169 Following the decision of the IFRS Interpretations Committee relating to SaaS contracts, entities were required to review their accounting policies and procedures to confirm that excluded costs were not capitalised and treated as an expense. The decision of the Committee also has implications for entities which are funded by Parliamentary appropriations. The development of computer software has historically been funded through equity injections or departmental capital budget appropriations. Given that expenditure on SaaS contracts is to be expensed there is the potential to create an operating loss position in an entity’s financial results. Entities should review their appropriation and budgeting framework to ensure that the accounting treatment of SaaS contracts is aligned with accounting treatment to avoid misalignment where activities were funded from capital appropriations and are now recognised through operating expenses. Given the Committee’s decision, the full extent of expenditure on computer software by entities will no longer be solely recorded in the balance sheet.

2.170 Figure 2.20 shows that Australian Government computer software has steadily increased since 2017–18, with a current gross book value of $21.1 billion as at 30 June 2022. The gross book value represents the total cumulative investment made by entities in developing or purchasing computer software that is in use or is under construction at each reporting date. At 30 June 2022, $2.3 billion of this balance was under construction, that is not yet finalised or in use.

Figure 2.19: Australian Government computer software (in use and under construction)

Source: ANAO analysis of 2018–19 to 2021–22 CFS.

2.171 As shown in Figure 2.20 computer software additions (as a percentage of gross book value) ranged between 10 - 12 per cent per year from 2017–18 to 2021–22. During 2021–22, Australian Government entities spent $2.3 billion on the purchase or internal development of computer software. Amortisation expense (as a percentage of gross book value) declined from 10 per cent to 8 per cent in 2021–22. The decrease in amortisation expenses is attributable to the growth in assets under construction (which are not amortised) during the period and the reassessment of useful lives of existing computer software assets (extending over longer periods).

2.172 At 30 June 2022 74 per cent of the reported balance of the Australian Government’s computer software was attributable to the following 10 entities:

• Australian Postal Corporation;
• Australian Taxation Office;
• Bureau of Meteorology;
• NBN Co Limited;
• Departments of: Agriculture, Water and the Environment; Defence; Education, Skills and Employment; Health; Home Affairs; and
• Services Australia.

2.173 The entities identified above also recorded the highest value of computer software additions in 2021–22 (comprising 73 per cent of total Australian Government computer software additions in the period). Table 2.14 includes the computer software additions of these entities and a description of their major software projects contributing to this balance.

Table 2.14: Major computer software projects in 2021–22

Source: ANAO 2021–22 Financial Statements Audits.

2.174 As part of the audit of these entities 2021–22 financial statements the ANAO has obtained assurance that the accounting policies and processes are consistent with the requirements of AASB 138 and the recent decisions of the Committee.

2.175 Given the history of rapid changes in technology, intangible assets are susceptible to technological obsolescence.⁹⁹ AASB 136 Impairment of Assets (AASB 136) requires entities to assess whether there is any indication that non-financial assets may be impaired at end of each reporting period. Specific requirements apply for impairment testing of intangible assets.¹⁰⁰

2.176 Australian Government entities recorded $110.0 million in write-downs and impairment of computer software in 2021–22. Figure 2.21 shows Australian Government recoverable amount write-downs and impairment for computer software over the past five years have ranged between $53.7 million and $150.2 million per year totalling $501.4 million.

Figure 2.20: Computer software recoverable amount write-downs

Source: ANAO analysis of 2018–19 to 2021–22 CFS

2.177 Impairment may arise where computer software is no longer fully in use or computer software under development is no longer expected to achieve the same capability as designed. Given the financial significance of computer software and the risk of technological obsolescence, it is important that entities have an appropriate policy is in place for impairment. Finance provides guidance in RMG 125 Commonwealth Entities Financial Statements Guide that entities should document their consideration of the indicators of impairment set out in AASB 136.

2.178 As part of the audit of these entities 2021–22 financial statements the ANAO has obtained assurance that these entities have appropriate accounting policies on impairment.

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 considers standards issued by the International Public Sector Accounting Standards Board (IPSASB).

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 AUASB bases its standards on those made by the International Auditing and Assurance Standards Board (IAASB), an independent standard setting board of the International Federation of Accountants.

3.5 The financial reporting and auditing frameworks that applied in 2021–22 are illustrated in Appendices 3 and 4 of this report.

Changes to the Australian public sector reporting framework

Changes to accounting standards

3.6 A new standard, AASB 1060, applied from 1 July 2021. The changes to disclosures were minimal for Tier 2 Commonwealth entities with the recognition and measurement requirements in other AAS retained. Changes to the FRR were made because of the adoption of AASB 1060 including the requirement for all entities to apply Tier 1 disclosures when applying AASB 16 Leases, disclose revenue recognised from contracts with customers and impairment losses on receivables arising from contracts with customers.

Changes to auditing standards

3.7 The revised ASA 315 will be effective for audits of financial reporting periods commencing 1 July 2022. The revisions respond 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.

3.8 The revised 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 IT general controls and information processing controls and explicit recognition of automated tools and techniques by auditors. It also emphasises and strengthens the documentation requirements relating to the exercise of professional scepticism by the auditor.

3.9 The revised standard is a significant driver of change for the financial statements audit methodology (methodology) for 2022–23. There are a significant number of new and revised procedures including the requirement for auditors to undertake a more robust risk assessment process. Key changes to the methodology are designed to address specific requirements related to understanding the entity, which broadly include:

1. more detailed requirements about understanding the operating environment of the entity;
2. additional emphasis on understanding the entity’s system of internal control and overall IT environment; and
3. new requirements specific to understanding the risks arising from the entity’s use of IT and related IT general controls addressing those risks.

3.10 Other changes to the methodology are intended to ensure that risks of material misstatement are identified appropriately based on inherent risk factors. This will enable the design of an effective audit approach that promotes consistency of execution, documentation and review.

Emerging areas

Auditing ethics

3.11 The Public Governance, Performance and Accountability Act 2013 (PGPA Act) requires accountable authorities of Commonwealth entities to govern their entities in a way that promotes the proper use and management of public resources. The PGPA Act defines proper use as ‘efficient, effective, economical and ethical’.

3.12 The ANAO assesses all aspects of the proper use of resources. A theme identified across a number of audits is a lack of adequate documentation and records to support the rationale for decisions made and actions undertaken. Lack of proper documentation of decision-making processes makes it difficult for entities to be assured that the activity was undertaken with integrity and without improper influence or consideration of inappropriate factors.

3.13 Greater scrutiny in this area will help ensure that the public sector is looking beyond technical compliance and operating in line with the intent of established rules and frameworks, alongside community expectations of integrity. A culture of integrity in an organisation flows from the standards set by its leaders.

3.14 The ANAO has developed an audit framework against which to test ethics, comprising:

1. the applicable legal framework;
2. activity-specific frameworks;
3. Government Policy Orders; and
4. entity-specific frameworks.

Sustainability reporting

3.15 Sustainability reporting encompasses the provision of financial and non-financial information on the social, environmental and economic impact of an entity’s day-to-day activities. Global interest in sustainability reporting has accelerated in recent years and there is rapid progression towards the development of international sustainability-related disclosure standards to drive high-quality reporting that is consistent and comparable.

3.16 On 3 November 2021, the IFRS Foundation established the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of sustainability-related disclosure standards focusing initially on the private sector. Noting that no equivalent international body had been tasked with considering sustainability-related disclosure standards in the public sector, the IPSASB identified itself as ideally placed to lead and expedite the development of public sector specific sustainability-related disclosure standards.

3.17 On 9 May 2022, IPSASB released a consultation paper Advancing Public Sector Sustainability Reporting¹⁰¹ for public comment (the paper). The paper, amongst other things, sought views and comments on the need for global public sector specific sustainability reporting guidance, whether the IPSASB’s experience, processes and relationships would enable it to develop global public sector specific sustainability reporting guidance effectively, and the sustainability-related topics considered most pressing and why they should be prioritised by IPSASB.

3.18 In late August and early September 2022, the ANAO led the Australasian Council of Auditors General (ACAG) Financial Reporting and Accounting Committee (FRAC) submission to IPSASB on the paper. ACAG FRAC provided support for the IPSASB preliminary views that:

1. there is a need for global public sector sustainability reporting guidance;
2. the IPSASB’s experience, processes and relationships would it enable it to develop global public sector sustainability guidance effectively;
3. the IPSASB works in collaboration with other international bodies such as the ISSB, International Auditing and Assurance Standards Board (IAASB) and the International Organisation of Supreme Audit Institutions (INTOSAI), and makes adaptations to address public sector sustainability issues;
4. global public sector-specific sustainability reporting guidance would address general sustainability-related information and climate disclosures first; and
5. key enablers for the development of global public sector specific sustainability reporting guidance are:
   • appropriate resourcing;
   • an experienced and active Sustainability Reference Group to advise the IPSASB;
   • ensuring IPSASB members have sufficient time to devote to sustainability reporting; and
   • effective co-ordination and dialogue with other sustainability standard setters.

3.19 ACAG FRAC also:

1. supported the IPSASB in considering the United Nations Sustainable Development Goals and interfacing with the IPSASB Natural Resources Project in developing sustainability-related guidance;
2. noted the European Financial Reporting Advisory Group (EFRAG) proposal to use the Environment, Social and Governance (ESG) classification with comprehensive sub-topics and supported its use to prioritise topics for developing sustainability-related guidance¹⁰²; and
3. requested that the IPSASB consider the auditability of sustainability-related information concurrently to ensure timely workable standards and guidance.

3.20 In Australia, the Financial Reporting Council (FRC), AASB and AUASB (the Boards) similarly noted increased stakeholder demand for authoritative guidance on sustainability-related matters. In November 2021, the Boards announced the intent to develop an Extended External Reporting (EER) regime within the current framework for financial reporting. The AASB will develop reporting requirements for sustainability-related matters in Australia and the AUASB will simultaneously update relevant assurance standards¹⁰³, which are already capable of addressing current voluntary disclosures¹⁰⁴.

3.21 In June 2022, the AASB confirmed that the sustainability reporting requirements will be based on the ISSB standards with modifications for Australian matters and requirements necessary to meet the needs of Australian stakeholders¹⁰⁵, and on 7 October 2022, the AUASB confirmed that it will consider the work of IAASB¹⁰⁶ and other international frameworks noting that the existing AUASB standards remain robust and appropriate¹⁰⁷.

3.22 The ANAO is actively following national and international developments in sustainability reporting and assurance and will continue to contribute to discussions on this matter as the reporting and assurance standards develop. The ANAO notes, at this stage, there has been little active discussion on sustainability reporting at the Commonwealth public sector level.

Quality assurance framework and reporting

ANAO quality assurance framework

3.23 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.

3.24 The ANAO Quality Assurance Framework and Plan 2022–23 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.

3.25 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.

3.26 The revised standards introduce a quality management approach that is focused on proactively identifying and responding to risks relating to 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 2022–23, the ANAO will implement enhancements to the ANAO Quality Assurance Framework to ensure compliance with the three new and revised standards by 15 December 2022. The enhancements to the framework will respond to the quality risks that arise in audits of public sector entities.

Ethics, independence and integrity

3.27 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 (including independence standards), are integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. The ANAO maintains a continued focus on independence through the application of ANAO independence policies that manage 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

3.28 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

3.29 The Audit Quality Report 2021–22 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 2021–22

3.30 In the 2021–22 audit cycle, the ANAO applied three standardised data analytics solutions to audits, at least one of which was used by more than 50 audit teams. Applying 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:

• an employee entitlements recalculation analytic;
• a tool for the risk assessment of journal entries to enhance fraud risk testing; and
• a solution for the testing of appropriations.

3.31 In addition to standardised data analytics, the ANAO develops data analytics solutions tailored to specific audits. For financial statements audits, these solutions most typically recalculate or reconcile entity specific balances that would otherwise be manually intensive, such as own source revenue, expenses and administered funding. The ANAO is also developing solutions based on common datasets (such as centralised government reporting for procurement and grant information) that can be used by all audit teams for risk assessment and planning.

3.32 Use of the standardised solutions is evaluated at the end of each audit cycle, with an evaluation for 2021–22 planned for December 2022. Previous evaluations have shown that teams realise both efficiency and quality improvements from the use of the standardised data analytics solutions, however audit teams continue to experience challenges acquiring quality data. The ANAO will continue to pursue efficiencies in the acquisition of data through collaboration with audit entities and the application of new technology to streamline data transfer and analytics process.

Note a: Three subsidiary entities classified by the Department of Finance as material are consolidated into parent entities. These entities are: ANSTO Nuclear Medicine Pty Ltd (consolidated into Australian Nuclear Science and Technology Organisation; CSIRO General Partner Pty Ltd (consolidated into Commonwealth Scientific and Industrial Research Organisation); and Voyages Indigenous Tourism Australia (consolidated into Indigenous Land and Sea Corporation).

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 2021–22 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 from 1 July 2022 onwards, relevant observations will inform the ANAO’s 2022–23 financial statements audit risk identification process.

4.0.4 This chapter reflects portfolio arrangements as at 30 June 2022 as established by the 18 March 2021 Administrative Arrangements Order.¹⁰⁸ Administrative Arrangement Orders commencing after 30 June 2022¹⁰⁹ are not taken into consideration. The following information for each portfolio is included in this chapter:

• an overview including:
  • an analysis of income, expenses, assets and liabilities that contributed to the 2021–22 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 2020–21 and 2021–22 key financial statements items and commentary regarding significant movements; and
  • key areas of financial statements risk including those areas identified as key audit matters (KAM)¹¹⁰;
• the status of significant and moderate audit findings reported in 2021–22 and previous years for all entities.

4.0.5 Figure 4.0.1 below provides each portfolio’s contribution, as a percentage of the Australian Government’s 2021–22 Consolidated Financial Statements (CFS).

Figure 4.0.1: Portfolio’s contribution as a percentage of the Australian Government’s 2021–22 Consolidated Financial Statements

Source: ANAO analysis of 2021–22 CFS.

4.0.6 Table 4.0.1 below presents a summary of significant and moderate findings reported as at 30 June 2022 and 30 June 2021 by portfolio and entity, including the number of findings carried forward as unresolved from the previous year. The findings and associated recommendations were agreed by all entities except for one moderate finding reported to the Department of the Treasury.

4.1 Agriculture, Water and the Environment portfolio

Portfolio overview

4.1.1 For the period ending 30 June 2022 Agriculture, Water and the Environment portfolio was 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; and 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 shows the Agriculture, Water and the Environment portfolio’s income, expenses, assets and liabilities for the year ended 30 June 2022.

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

Source: ANAO analysis of 2021–22 Consolidated Financial Statements.

4.1.3 As previously outlined in Chapter 2, paragraph 2.10, 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 2021–22 financial statements audits. 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 reported to entities in the Agriculture, Water and the Environment portfolio

Note a: The current year adjustments include adjustments identified in 2021–22 that relate to the prior year.

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

4.1.4 The following section provides a summary of the 2021–22 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 DAWE is responsible for developing and implementing policies and initiatives to promote more sustainable, productive, internationally competitive and profitable Australian agricultural, food and fibre industries; and safeguarding Australia’s animal and plant health status to maintain overseas markets and protect the economy and environment from exotic pests and diseases

Summary of financial performance

4.1.6 The following section provides a comparison of the 2020–21 and 2021–22 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.

Table 4.1.3: Key departmental financial statements items

Source: DAWE’s audited financial statements for the year ended 30 June 2022.

4.1.7 In 2021–22 there was a decrease in total comprehensive income attributable to the Australian Government of $203.7 million. The main drivers included the following offsetting factors:

• an increase in supplier expenses of $325.9 million, mainly due to the approved operating loss for 2021–22, the department sought and received approval to spend funds from prior periods which were impacted by delays from procurement and activity due to the COVID-19 pandemic, and the impact of new budget measures and outcomes in 2021–22; and
• the remeasurement of the Antarctic restoration provision due to changes in economic assumptions, mainly the long-term discount rate applied in the calculation of the provision, resulting in gains on provisions of $114.8 million and other comprehensive income of $64.3 million.

4.1.8 Total liabilities decreased by $193.9 million primarily due to a reduction in the value of the Antarctic restoration provisions. The decrease in the provision reflects updated economic assumptions compared to the prior year. The main movement was more favourable interest rates, which results in an increase in the assumptions relating to long-term discount rate applied in calculating the value of the provision (which is forecast to be settled over a long term). The decrease in the value of 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 2022.

4.1.9 The decrease in total expenses is mainly attributable to the following offsetting factors:

• a reduction in concessional loan discount expenses, recorded at the date at which a loan commitment to a farm business is made, of $396.6 million. The reduction in expenses is due to the approval of less loan commitments during 2021–22 compared to 2020–21; and
• an increase of $142.3 million in levy disbursements and Commonwealth contributions expenses for agricultural programs due to higher collections of levies from industry (refer to paragraph 4.1.10).

4.1.10 Total income has increased by $174.3 million mainly due to:

• additional taxation revenue from levies and charges of $111.3 million primarily attributable to an increase in agricultural production from favourable seasonal conditions, leading to larger harvests in field crops for which charges are levied; and
• additional interest revenue of $49.8 million, reflecting the overall increase in the total value of loans made to farm businesses.

4.1.11 Total comprehensive income increased primarily as a result of the revaluation gains of $192.9 million recorded on administered investments in Corporate Commonwealth entities (refer to paragraph 4.1.12) and the increase in the value of asset revaluation reserves owing to the increase of $84.7 million in the value of Commonwealth’s share of the net assets in the joint operation – River Murray Operations.

4.1.12 Total assets have increased by $1,536.5 million due mainly to the following factors:

• an increase of $1,113.8 million in concessional loans to farm businesses by the Regional Investment Corporation made on behalf of DAWE;
• an increase to the fair value of investments in Corporate Commonwealth entities of $334.1 million, reflecting an increase in the underlying net assets of corporate entities within the Agriculture, Water and the Environment portfolio. The movement was mainly attributable to additional cash held by the Grains Research and Development Corporation, Director of National Parks and Murray Darling Basin Authority and an increase in the fair value of non-financial assets recorded by the Sydney Harbour Federation Trust following a revaluation.

4.1.13 Total liabilities have decreased primarily as a result of the reduction for the provision for loan commitments to farm businesses of $301.5 million. This provision represents the value of the concessional discount on loans contracted but not yet settled on behalf of DAWE by the Regional Investment Corporation. The decrease reflects the settlement of a significant number of contracted loans during 2021–22.

Key areas of financial risk

4.1.14 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DAWE’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.1.5.

Table 4.1.5: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and DAWE’s audited financial statements for the year ended 30 June 2022.

Audit results

4.1.15 The following table summarises the status of the audit findings reported by the ANAO in 2020–21 and 2021–22.

Table 4.1.6: Status of audit finding

Source: ANAO 2021–22 audit results.

4.1.16 For the findings listed below, the ANAO undertook additional audit procedures to gain assurance that DAWE’s 2021–22 financial statements were not materially misstated.

New moderate audit finding

FMIS Privileged User Management

4.1.17 Maintaining and supporting IT systems requires some user accounts, both at the network and the application level, to have extensive access rights (privileged access). Privileged user accounts can be used to circumvent security controls to make direct changes, either to system settings or systems data, or to access files and accounts used by others. During 2021–22 the ANAO identified weaknesses in the effectiveness of DAWE’s monitoring of privileged user activities within the Financial Management Information System (FMIS).

4.1.18 The ANAO identified that audit logs of privileged activity reports were not subject to regular review. In addition, reviews confirming the currency and need for user access to the FMIS were not completed for part of 2021–22. These reviews are required on a monthly basis by DAWE’s internal policies and procedures. Failure to undertake these reviews increases the risk of erroneous or unauthorised changes to IT systems will not be identified and addressed. The ANAO recommended that DAWE recommence these reviews.

4.1.19 DAWE committed to reviewing and resolving the outstanding activity reports and logs to provide assurance over the appropriateness of privileged user activities. The ANAO will confirm the implementation and effective operation of the monitoring of privileged user access as part of the 2022–23 financial statements audit.

Bureau of Meteorology

4.1.20 The Bureau of Meteorology (the Bureau) 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

4.1.21 The following section provides a comparison of the 2020–21 and 2021–22 key departmental and administered financial statements items reported by the Bureau (as outlined in Table 4.1.7 and Table 4.1.8) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.1.7: Key departmental financial statements items

Source: The Bureau’s audited financial statements for the year ended 30 June 2022.

4.1.22 The increase in revenue from government reflects additional funding received for new programs including support for the ‘Building Australia’s Resilience’ budget measure which established the Australian Climate Service administered by the Bureau.

4.1.23 The decrease in the net cost of services of $33.2 million is mainly due to a decrease in depreciation and amortisation expenses associated with non-financial assets at the end of useful lives and less than expected roll-out of replacement assets.

4.1.24 The increase in total assets of $170.3 million is mainly attributable to:

• an increase in appropriation receivable of $95.2 million arising from delayed expenditure of equity appropriations arising from delays in supply of equipment arising from the impacts of the COVID-19 pandemic on the supply chain, resourcing shortfalls and deferral of certain projects to 2022–23;
• an increase in computer software of $65.0 million reflecting purchase and development of software to support the Bureau’s operations.

Table 4.1.8: Key administered financial statements items

Source: The Bureau’s audited financial statements for the year ended 30 June 2022.

4.1.25 In 2018–19 the Bureau ceased activities in relation to the sale of third-party advertising which was reported as an administered activity. During 2021–22 all remaining administered balances related to this function were settled. As a result, from 2022–23, the Bureau is no longer expecting to prepare administered financial statements.

Key areas of financial risk

4.1.26 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the Bureau’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.1.9.

Table 4.1.9: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and the Bureau’s audited financial statements for the year ended 30 June 2022.

Audit results

4.1.27 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

4.2 Attorney-General’s portfolio

Portfolio overview

4.2.1 The Attorney-General’s (AGD) 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 shows the Attorney-General’s portfolio’s income, expenses, assets and liabilities for the year ended 30 June 2022.

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

Source: ANAO analysis of 2021–22 CFS.

4.2.3 As previously outlined in Chapter 2, paragraph 2.10, 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 2021–22 financial statements audits. 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 reported to entities in the Attorney-General’s portfolio

Note a: The current year adjustments include adjustments identified in 2021–22 that relate to the prior year.

Source: ANAO analysis of audit differences reported to entities in the AGD portfolio.

4.2.4 The following section provides a summary of the 2021–22 financial statements audit results for the Attorney-General’s Department, and findings for other material entities and non-material entities in the portfolio.

Attorney-General’s Department

4.2.5 The Attorney-General’s Department (AGD) supports the Attorney-General and Minister for Industrial Relations and the Assistant Minister to the Attorney-General and Assistant Minister for Industrial Relations. The role of the department is 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 2020–21 and 2021–22 key departmental and administered financial statements items reported by AGD and includes commentary regarding significant movements between years, as outlined in Table 4.2.3 and Table 4.2.4.

Table 4.2.3: Key departmental financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2022.

4.2.7 Revenue from government has increased by $6.4 million mainly due to new measures including the Respect@Work implementation, woman’s safety funding and the Royal Commission into Defence and Veteran Suicide.

4.2.8 Total assets and total liabilities have decreased by $26.0 million and $34.7 million respectively, mainly as a result of modifications to leases. The reduction in total assets was offset by an increase in the value of leasehold improvements.

Table 4.2.4: Key administered financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2022.

4.2.9 The $105.2 million increase in total expenses is mainly due to increased staffing, hearings and report preparations for the Royal Commission into Defence and Veteran Suicide and the Disability Royal Commission. There was also an increase in grants expenditure for the Family Relationship Services program, domestic violence support, and community legal services in relation to Royal Commissions.

4.2.10 The $48.4 million increase in total income is primarily due to the recognition of a gain resulting from the return funding from Comcare for claims to be returned to the consolidated revenue fund. 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. AGD has subsequently transferred the funds to the consolidated revenue fund.

Key areas of financial risk

4.2.11 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of AGD’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.2.5.

Table 4.2.5: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and AGD’s audited financial statements for the year ended 30 June 2022.

Audit results

4.2.12 The following table summarises the status of audit findings reported by the ANAO in 2020–21 and 2021–22.

Table 4.2.6: Status of audit findings

Source: ANAO 2021–22 audit results.

4.2.13 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that AGD’s 2021–22 financial statements were not materially misstated.

New moderate audit finding

User Access Removal

4.2.14 The ANAO identified weaknesses in the process for the removal of user access when employees or contractors separated from AGD. In some instances, access was retained for up to 13 days. User accounts should be removed on the date of separation as there is no longer a business requirement for access after this date.

4.2.15 Consistent with the ANAO’s recommendation, AGD has advised that the user access removal processes will be reviewed and strengthened, and a new monitoring process implemented. The ANAO will review the updated processes during the 2022–23 audit.

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 2020–21 and 2021–22 key departmental financial statements items reported by Coal LSL (as outlined in Table 4.2.7) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.7: Key financial statements items

Source: Coal LSL’s audited financial statements for the year ended 30 June 2022.

4.2.18 Net cost of services increased as a result of unfavourable movements in the fair value of investments held at 30 June 2022, in conjunction with an increase in net realised losses on sale of investments in 2021–22.

4.2.19 The decrease in total assets is attributable to the reduction in fair value of investments in unit trusts totalling $136.8 million at 30 June 2022. The movement in fair value is the result of realised and unrealised losses in fair value at year-end in comparison to 2020–21.

4.2.20 Total liabilities decreased in 2021–22 due to the reduction in the provision for reimbursements of $72.7 million. The reduction was largely attributable to a change in the discount rate used at 30 June 2022, partially offset by an increase in additional provisions recognised during 2021–22.

Key areas of financial risk

4.2.21 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Coal LSL’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.2.8.

Table 4.2.8: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and Coal LSL’s audited financial statements for the year ended 30 June 2022.

Audit results

4.2.22 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Comcare

4.2.23 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

4.2.24 The following section provides a comparison of the 2020–21 and 2021–22 key departmental financial statements items reported by Comcare (as outlined in Table 4.2.9) and includes commentary regarding significant movements between years.

Table 4.2.9: Key departmental financial statements items

Source: Comcare’s audited financial statements for the year ended 30 June 2022.

4.2.25 The improvement in the net contribution by services was largely due to the net increase in gains from the movement in the workers’ compensation claims provision and common law asbestos-related disease claims provision of $61.4 million. These movements reflect changes in economic assumptions including inflation and discount rates impacting on the actuarial valuation.

4.2.26 Comcare has arrangements for special appropriations funding for claims to be returned to the Commonwealth when it is surplus to Comcare’s requirements, after third-party recoveries. This is reflected in the movement in the available funding from movement in claims provision.

4.2.27 Total assets decreased due to a reduction in Comcare’s cash position of $446.5 million, and a reduction of $54.0 million in appropriations receivable. This is in line with the reduction in total payables, reflecting the settlement of a prior year payable to the ACT government and Australian National University. These entities have taken on relevant liabilities previously carried by Comcare as a result of becoming self-insured license holders under the Safety, Rehabilitation and Compensation Act 1988. The reduction in total liabilities, in addition to the above, was due to a decrease of $134.6 million in the common law asbestos-related disease claims provision and $15.1 million in the workers’ compensation claims provision as a result of the current year actuarial valuation.

Key areas of financial 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 specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.2.10.

Table 4.2.10: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and Comcare’s audited financial statements for the year ended 30 June 2022.

Audit results

4.2.29 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

High Court Australia

4.2.30 The High Court Australia (the Court) is responsible for interpreting and applying the law of Australia; and 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 2020–21 and 2021–22 key departmental and administered financial statements items reported by the Court (as outlined in Table 4.2.11 and Table 4.2.12) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.2.11: Key departmental financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2022.

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

Table 4.2.12: Key administered financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2022.

4.2.33 The Court’s administered income relates to its filing and hearing fees. The decrease in administered income is due to lower volumes of filings and hearing in 2021–22.

Key areas of financial risk

4.2.34 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the Court’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.2.13.

Table 4.2.13: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and the Court’s audited financial statements for the year ended 30 June 2022.

Audit results

4.2.35 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

National Archives of Australia

4.2.36 The National Archives of Australia (National Archives) is an Australian Government entity established under the Archives Act 1983. The National Archives 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; and collects records of government decisions and actions.

Summary of financial performance

4.2.37 The following section provides a comparison of the 2020–21 and 2021–22 key departmental financial statements items reported by National Archives (as 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 Archives’ audited financial statements for the year ended 30 June 2022.

4.2.38 Net cost of services increased due to the additional staffing levels and expenses resulting from the Defend the Past, Protect the Future (DPPF) program. The DPPF program is enabling the digital preservation of critical at-risk collection material before 2025.

4.2.39 The movement in assets is due to current year amortisation of the right-of use asset of $21 million, offset by an increase in property and plant and heritage and cultural assets of $9.2 million primarily due to the take on of new archive records. Movements in other balances reflect normal business activities.

Key areas of financial risk

4.2.40 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of National Archives’ financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.2.15.

Table 4.2.15: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and National Archives’ audited financial statements for the year ended 30 June 2022.

Audit results

4.2.41 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Comments on non-material entities

Administrative Appeals Tribunal

4.2.42 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

4.2.43 The following table summarises the status of the audit finding reported by the ANAO in 2020–21 and 2021–22.

Table 4.2.16: Status of audit finding

Source: ANAO 2021–22 audit results

4.2.44 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that AAT’s 2021–22 financial statements were not materially misstated.

New moderate audit finding

Lease management

4.2.45 The AAT uses a third-party provider, for the management and recording of leases. Documents relating to any new lease agreements or lease modifications are provided to the provider for entry into its system. All lease details and calculations are maintained in the provider’s system and information is used by AAT as a basis for management and financial reporting.

4.2.46 ANAO testing identified an error in the input data for a lease modification resulting in an understatement of the right-of-use asset balance and the lease liability as well as the in-year impact to depreciation and interest expense. The adjustment required was material to the AAT financial statements.

4.2.47 In line with ANAO’s recommendation AAT will implement appropriate review and quality assurance processes to ensure activity undertaken by the third-party provider is complete and accurate. The ANAO will review the design and implementation of this process as part of the 2022–23 financial statements audit.

Australian Financial Security Authority

4.2.48 The Australian Financial Security Authority (AFSA) is an executive agency responsible for Australia’s personal insolvency and personal property securities systems. AFSA provides Official Trustee and registry services and administers the personal property securities register.

Audit results

4.2.49 The following table summarises the status of the audit finding reported by the ANAO in 2020–21 and 2021–22.

Table 4.2.17: Status of audit finding

Source: ANAO 2021–22 audit results

4.2.50 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that AFSA’s 2021–22 financial statements were not materially misstated.

Resolved significant legislative breach

Overdrawn Special Account

4.2.51 During 2021–22, AFSA processed a transfer of funds that resulted in the overdrawing of the Confiscated Assets Special Account, and a breach of section 83 of the Constitution. A transfer reversing the incorrect amount was processed on the same day. AFSA implemented additional controls for all special accounts managed by the entity. Based on the implementation of the additional controls, this finding was considered resolved and closed during the 2021–22 final audit phase.

Australian Human Rights Commission

4.2.52 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

4.2.53 The following table summarises the status of the audit finding reported by the ANAO in 2020–21 and 2021–22.

Table 4.2.18: Status of audit finding

Source: ANAO 2021–22 audit results.

Resolved significant audit finding

Weaknesses relating to financial management

4.2.54 In 2020–21, the ANAO identified that the Commission had a history of operating deficits dating back to 2017–18. The continued deficits resulted in the Commission having a net liability position at year end for both 2019–20 and 2020–21. The ANAO recommended that the Commission review the design and effectiveness of its key financial management and budgetary controls.

4.2.55 During 2021–22, the Commission received an equity injection of $16.05 million to return the Commission to a financially sustainable footing. The equity injection was used to replenish the cash reserves in relation to previous overspends, to meet the redundancy commitments of the organisation and support the Commission’s operations to 30 June 2022.

4.2.56 In 2021–22, the Attorney-General’s Department established a tripartite steering committee, in conjunction with the Commission and the Department of Finance to support the development of options and the implementation of strategies to transition the Commission to a sustainable financial footing. To this end the financial management of the organisation has been significantly strengthened. A Director of Corporate Services role with oversight of Finance, Human resources and ICT has been created and a new Chief Finance Officer appointed. The budget management process has been improved by the establishment of budget reporting standards and thresholds for budget variances and commentary. New financial reporting processes have been implemented and budget monitoring mechanisms have been enhanced with the establishment of a budget steering committee to regularly review financial statements and budget variance reports and take appropriate corrective action, where required.

Seafarers Safety, Rehabilitation and Compensation Authority

4.2.57 Seafarers Safety, Rehabilitation and Compensation Authority (Seacare Authority) oversees a national scheme of occupational health and safety and worker’s’ compensation arrangements for defined seafarers. Seacare Authority administers the Seafarers Safety Net Fund that acts in the place of an employer if a default event occurs, enabling employees to lodge a claim event when there is no employer to lodge against.

Audit results

4.2.58 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Emphasis of matter

4.2.59 An Emphasis of Matter paragraph has been included in the 2021–22 auditor’s report to draw users’ attention to the material uncertainty related to going concern. Seacare Authority has been unable to negotiate insurance for the Seafarers Safety Net Fund beyond 31 March 2022. Where a default event is accepted after 31 March 2022, Seacare Authority will be required to meet the obligations from the Fund’s reserves, which may not be sufficient. These events and conditions, along with other matters disclosed in Seacare Authority’s 2021–22 financial statements, indicate that a material uncertainty exists that may cast significant doubt on the ability of the Seacare Authority to maintain the Fund as a going concern.

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 the 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 2021–22, 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 At the time of finalisation of this report, three non material Defence portfolio entity financial statement audits for the year ended 30 June 2022 were still in progress. A number of emerging issues have been identified and have resulted in the delays to the finalisation of the audit. Refer to paragraph 4.3.114 for further information on these entities.

4.3.4 Figure 4.3.1 shows the Defence portfolio’s income, expenses, assets and liabilities for the year ended 30 June 2022.

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

Source: ANAO analysis of 2021–22 CFS.

4.3.5 As previously outlined in Chapter 2, paragraph 2.10, 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 2021–22 financial statements audits. 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 reported to entities in the Defence portfolio

Note a: The current year adjustments include adjustments identified in 2021–22 that relate to the prior year.

Note b: The adjustments include adjustments identified in 2020–21 that relate to 2019–20

Source: ANAO analysis of audit differences reported to entities in the Defence portfolio.

4.3.6 The following section provides a summary of the 2021–22 financial statements audit results for Defence, and other material entities.

Department of Defence

4.3.7 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

4.3.8 The following section provides a comparison of the 2020–21 and 2021–22 key departmental and administered financial statements items reported by Defence (as outlined in Table 4.3.3 and Table 4.3.4) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.3: Key departmental financial statements items

Source: Defence’s audited financial statements for the year ended 30 June 2022.

4.3.9 The net cost of services was higher due to an increase in supplier expenses, which included an $832 million payment to the Naval Group for the termination of the Attack Class submarine project and an increase in sustainment, repairs, overhaul and maintenance costs across a range of Defence assets. In addition, there was a large increase in the write-down and impairment of assets as previously capitalised costs associated with the Attack Class submarine project of $2.1 billion were written off during 2021–22.

4.3.10 Revenue from government continued to grow in line with expectations of increased levels of activity across Defence,, and to fund increased levels of capital and inventory acquisitions.

4.3.11 Total comprehensive income increased as a result of a $5.3 billion increase primarily from the revaluation of specialist military equipment.

4.3.12 Total assets and equity increased due to the revaluation adjustment mentioned above, and purchases of land and buildings, and specialist military equipment.

Table 4.3.4: Key administered financial statements items

Source: Defence’s audited financial statements for the year ended 30 June 2022.

4.3.13 The increase in total expenses was due to an increase in net service costs and notional interest costs associated with Defence’s defined benefit superannuation schemes.

4.3.14 The significant increase in other comprehensive income and significant decrease in total liabilities are due to the increase in the government bond rates used to fair value Defence’s defined benefit superannuation schemes.

Key areas of financial risk

4.3.15 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 specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.3.5.

Table 4.3.5: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and Defence’s audited financial statements for the year ended 30 June 2022.

Audit results

4.3.16 The following table summarises the status of audit findings reported by the ANAO in 2020–21 and 2021–22.

Table 4.3.6: Status of audit findings

Note a: A significant audit finding related to the valuation of SME using the cost attribution model, raised during 2020–21, was downgraded to a moderate finding during the 2021–22 interim audit. A discussion of this finding can be found in the Auditor-General Report No. 40 2021–22 Interim Report on Key Financial Controls of Major Entities. This finding remains unresolved.

Note b: A minor finding related to asset disposal processes, which was first raised in 2018–19 has been upgraded to a moderate finding during the 2021–22 audit.

Source: ANAO 2021–22 audit results.

4.3.17 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Defence’s 2021–22 financial statements were not materially misstated.

New moderate audit finding

Weaknesses around the disposal of assets and inventory

4.3.18 Since 2018–19, the ANAO has identified a number of control weaknesses around the disposal of assets and inventory. The issues primarily relate to controls around the sign-off of paperwork to authorise the disposal of assets and inventory, and the timely recording of the disposal in the general ledger. The weaknesses have resulted in assets which have been disposed of in the incorrect reporting period, resulting in a misstatement in the financial statements.

4.3.19 During 2021–22 the ANAO continued to identify the issues with disposal processes. The risk rating of this finding has been increased to moderate noting Defence has not put in place appropriate controls to ensure compliance with its policies and procedures for the timely processing of asset and inventory disposals.

Downgraded significant audit finding

Valuation of specialist military equipment using the cost attribution model

4.3.20 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.

4.3.21 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. 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. Analysis of project employee costs estimate this to understate asset capitalisations by $62.7 million in 2021–22.

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 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;
• 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.

4.3.25 Defence has agreed to the recommendations made by the ANAO and has updated its policies, processes and guidelines to improve the consistency of judgements across SME projects. The new policy has been implemented with effect from 1 July 2022 and will apply to new projects. The ANAO will review the effectiveness of the implementation of the new policy and processes as part of the 2022–23 audit. The audit finding has been downgraded to a moderate risk in recognition of Defence’s significant progress in remediating the weaknesses identified.

Resolved moderate audit finding

Specialist military equipment valuation methodology

4.3.26 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 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.

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

4.3.28 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.

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

4.3.30 To address the weaknesses, Defence engaged an external valuation expert to undertake its valuation of SME. The external expert has undertaken a valuation of Defence’s SME as at 30 June 2022. The ANAO has reviewed the work performed by Defence’s external valuation expert and is satisfied that the matters raised in the prior year have been addressed.

Unresolved moderate audit findings

Weaknesses around the governance of ADF health services

4.3.31 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.

4.3.32 As part of the 2020–21 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 that 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.

4.3.33 Defence has advised the ANAO that progress has been made to address the audit finding. The ANAO will continue to examine the remediation activities as part of the 2022–23 audit.

Management of privacy data

4.3.34 Management of personally identifiable data is a responsibility of all Australian Government entities subject to the Privacy Act 1988. Under the Privacy 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.

4.3.35 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.

4.3.36 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.

4.3.37 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.

4.3.38 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.

4.3.39 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.

4.3.40 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 2022–23 audit.

Use of appropriations

4.3.41 Section 83 of the Constitution states that ‘No money shall be drawn from the Treasury of the Commonwealth except under an appropriation made by law’. Section 54 states that ‘The proposed law which appropriates revenue or moneys for the ordinary annual services of the Government shall deal only with such appropriation’, and section 53 states that ‘The Senate may not amend proposed laws imposing taxation, or proposed laws appropriating revenue or moneys for the ordinary annual services of the Government.’

4.3.42 These constitutional provisions are given effect by Appropriation Bills presented to the Parliament, which distinguish between moneys appropriated for the ordinary annual services of the government and other appropriations. Appropriation Bill (No. 1) contains details of estimates for the ordinary annual services of the government. Appropriation Bill (No. 2) contains amounts that are not for the ordinary annual services of government. Appropriation Bill No. 2 contains the following amounts: new administered outcomes, non-operating, and payments to states, territories and local government.¹¹¹

4.3.43 During the 2021–22 audit of Defence, the ANAO observed that the contract termination payment of $832 million made to Naval Group in relation to the cancelled Attack Class submarine project was paid out of appropriation funding (Appropriation Act No. 2 2020–2021) that had been provided by the Parliament as non-operating funding. The ANAO queried whether the use of this funding source, originally approved by Parliament for as ‘non-operating’¹¹², could be used for the termination payment, which would be classified as operating expenditure.

4.3.44 The termination payment to Naval Group was approved by the Australian Government. Defence has advised the ANAO that it considered the funding approval from Government along with discussions with the Department of Finance (Finance) as sufficient authority for the use of the appropriation.

4.3.45 Subsequent to the payment being made to Naval Group, Defence sought advice on the legality of the funding source used to make the termination payment and specifically whether this had resulted in a breach of section 83 of the Constitution. Advice received from the Australian Government Solicitor (AGS) concluded that, ‘we think that in this case a court would, on balance, find that no breach of s 83 has occurred’. The AGS advice was informed by a view that it is difficult to ascertain meaning for certain expressions and definitions included in the Appropriation Acts.

4.3.46 While the AGS advice concluded that a constitutional breach was unlikely, it stated “that regardless of the legal position, accounting principles and Department of Finance policy might dictate that the termination payment should have been funded from a different appropriation”. Further the advice noted that the AGS ‘would generally advise agencies not to use amounts appropriated as an ‘other departmental item’ for purposes that are not in the nature of capital expenditure.’

4.3.47 Section 21 of the Public Governance, Performance and Accountability Act 2013 requires that the accountable authority of a non-corporate commonwealth entity must govern the entity in a way that is not inconsistent with the policies of the Australian Government. Finance has established a rules-based framework to prevent entities from spending money for purposes other than which it was appropriated. The framework, as outlined in the Resource Management Guides,¹¹³ describes non-operating costs to include equity injections to be used for specific purposes, such as investments in assets and major purchases of new and replacement assets but does not include operating costs.

4.3.48 Following the audit of Defence, the ANAO raised the implications of the legal advice on the appropriation framework with Finance, as it has administrative responsibility for the Appropriation Acts. In response to these concerns Finance advised that it had:

discussed this matter with the AGS. On the basis of discussions to date, …[Finance]… do not believe that there are strong grounds for concern that the advice has broader implications for the appropriations framework or the intended operation of annual Appropriation Acts. As you would appreciate, the development of Appropriation Acts is always undertaken in consultation with the Office of Parliamentary Counsel (OPC) and the AGS.

4.3.49 Finance also advised that:

to manage any potential risk to the legislative framework for appropriations and to ensure this scenario remains an isolated, one-off occurrence, …[Finance]… will review our policy and guidance to ensure the integrity of the appropriation framework, including in relation to equity injections. Further, …[Finance]… will continue to engage with OPC and AGS on the development of future annual Appropriation Acts.

4.3.50 The ANAO is concerned that the full implications of the legal advice have not been considered by Finance.¹¹⁴ In the case of the Defence spending, the appropriation, as passed by the Parliament, was intended to result non-operating expenditure. It is unclear whether the Parliament would have anticipated that the appropriation provided to Defence could have been used for a different purpose, a contract termination payment (operating expenditure). It is also unclear how this instance can be treated as a ‘isolated, one-off occurrence’ that can be dealt with through policy and guidance if the use of a n on-operating appropriation for operating expenditure is not considered to be inconsistent with the descriptions included in the Appropriation Acts.

4.3.51 The risk for the Parliament from this precedent is that the controls and framework supporting the appropriation of and expenditure of funds it may have reasonably considered to be in place, for example that an appropriation for non-operating purposes could only be use for that purpose, may not in fact exist.

Australian Signals Directorate

4.3.52 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

4.3.53 The following section provides a comparison of the 2020–21 and 2021–22 key departmental and administered financial statements items reported by ASD (as outlined in Table 4.3.6 and Table 4.3.7) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.6: Key departmental financial statements items

Source: ASD’s audited financial statements for the year ended 30 June 2022.

4.3.54 Revenue from government has increased mainly due to the impact of additional funding from the Australian Government for delivery of programs and projects. The increase in funding contributed to the increase in net cost of services of $95.1 million. The increase in the net cost of services was primarily due to:

• growth in employee benefits expenses of $40.5 million;
• an additional $64.6 million in supplier expenses incurred due to the delivery additional programs and output; and
• an increase in depreciation expenses of $14.3 million reflecting the roll-out of assets under construction and newly recognised lease right-of-use assets during the period.

4.3.55 Total assets increased mainly as a result of recognition of an additional $243.6 million of non-financial assets, comprising:

• purchase and/or construction of additional plant, equipment, buildings and infrastructure. In 2021–22 ASD received $237.9 million from the Australian Government in equity contributions to fund the development of these assets; and
• recognition of lease right-of-use assets in accordance with AASB 16 Leases. During 2021–21 ASD entered into lease agreements for office space resulting in the recognition of lease right-of-use assets of $193.1 million which will be amortised over the term of the lease contract.

4.3.56 Total liabilities increased as a result of an increase in lease liabilities of $160.5 million (refer to paragraph 4.3.54) and an increase in supplier payables of $25.3 million resulting from the increase in supplier expenses (refer to paragraph 4.3.53).

Table 4.3.7: Key administered financial statements items

Source: ASD’s audited financial statements for the year ended 30 June 2022.

4.3.57 Movements in the balance of ASD’s administered assets and liabilities reflect normal business activities.

Key areas of financial risk

4.3.58 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of ASD’s financial statements. The ANAO focused audit effort on those specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.3.8.

Table 4.3.8: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and ASD’s audited financial statements for the year ended 30 June 2022.

Audit results

4.3.59 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Australian War Memorial

4.3.60 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

4.3.61 The following section provides a comparison of the 2020–21 and 2021–22 key financial statements items reported by AWM (as outlined in Table 4.3.9) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.9: Key financial statements items

Source: AWM’s audited financial statements for the year ended 30 June 2022.

4.3.62 Total assets increased by $139.7 million, mainly due to an $83.0 million increase in investments held for the Development Project funding and a $56.7millin increase in work in progress relating to early works for the Development Project.

4.3.63 The AWM also reported future commitments at year-end of $33.4 million for the acquisition of buildings, heritage and cultural, plant and equipment, exhibitions and software. The majority of these commitments related to the Development Project, including $7.8 million for project management services, $4.9 million for plant and material for the mains works package (including Anzac Hall), and $5.6 million for civil excavation and earth works.

Key areas of financial risk

4.3.64 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 specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.3.10.

Table 4.3.10: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and AWM’s audited financial statements for the year ended 30 June 2022.

Audit results

4.3.65 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Defence Housing Australia

4.3.66 The 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

4.3.67 The following section provides a comparison of the 2020–21 and 2021–22 key departmental financial statements items reported by DHA (as outlined in Table 4.3.11) and includes commentary regarding significant movements between years.

Table 4.3.11: Key financial statements items

Source: DHA’s audited financial statements for the year ended 30 June 2022.

4.3.68 The increase in total income is the result of a net reversal of write-downs and impairment of assets due market improvements resulting in a writeback of investment properties of $35 million and inventories of $10.6 million. In addition, there has been an increase in rental revenue due to the revaluation, this is partially offset by a reduction in rent from external tenants.

4.3.69 The decrease in total expenses related to a decrease in the cost of inventories sold which correlated to the decrease in sales. This is in line with DHA’s business strategy to reduce development and increase direct leasing from the market. In addition, the loan was repaid as at April 2022 resulting in a lower interest expense in the current year. These decreases are offset by an increase in repairs and maintenance expenses due to the backlog of work being caught up after easing of restrictions due to the COVID-19 pandemic.

4.3.70 The decrease in total assets is due to the disposal of inventory stock. In addition to the repayment of loans, which also resulted in a corresponding decrease in total liabilities.

Key areas of financial risk

4.3.71 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 specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.3.12.

Table 4.3.12: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and DHA’s audited financial statements for the year ended 30 June 2022.

Audit results

4.3.72 There were no significant or moderate audit findings arising from the 2020–21 or 2021–22 financial statements audits.

Department of Veterans’ Affairs

4.3.73 The Department of Veterans’ Affairs (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.

4.3.74 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; determining and managing claims relating to defence service under the Safety, Rehabilitation and Compensation (Defence-related Claims) Act 1988; the administration of benefits and arrangements under the Military Rehabilitation and Compensation Act 2004; 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

4.3.75 The following section provides a comparison of the 2020–21 and 2021–22 key departmental and administered financial statements items reported by DVA (as outlined in Table 4.3.13 and Table 4.3.14) and includes commentary regarding significant movements between years contributing to overall performance.

Table 4.3.13: Key departmental financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2022.

4.3.76 The net cost of services increased by $61.5 million mainly due to a $45.3 million increase in employee benefits as a result of staff numbers increasing from 1,613 to 2,066 in 2021–22 and a $20.9 million increase in suppliers expenses including a $9.0 million increase in the cost of contractors for work in claims processing, $4.7 million relating to the digitisation of records, and $3.6 million for projects associated with information technology services. The increased expenditure was partially offset by a $20.4 million increase in revenue from government.

4.3.77 Total liabilities increased by $25.2 million mainly due to a $26.1 million increase in outstanding claims relating to the Defence Service Homes Insurance Scheme.

Table 4.3.14: Key administered financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2022.

4.3.78 Total administered expenses decreased by $1.3 billion due to a $426.0 million decrease in personal benefits and health care payments for veterans, $3.1 billion decrease in the provision for personal benefits, offset by a $2.2 billion increase in the provision for health care payments. The movements in these provisions were the result of the actuarial assessment of the department’s estimated future obligations in respect of the military compensation provisions (personal benefits and health care) at 30 June 2022.

4.3.79 Total administered income increased by $15.1 billion reflecting gains in the movement of the personal benefits and health care provisions, after taking into account the impact of rising interest rates in the calculation of discounted cashflows as part of the valuation of the military compensation provisions at year-end.

4.3.80 Total administered liabilities decreased by $4.0 billion as a result of a $2.6 billion decrease in the personal benefits provision and a $1.3 billion decrease in the health care provision at year-end following the actuarial assessment. The overall decrease was calculated after DVA applied a $3.6 billion risk adjustment, in 2021–22 to address the risk that the military compensation provisions could be insufficient, in view of significant increases in the provisions in recent years.

Key areas of financial statements risk

4.3.81 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 specific areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2021–22 are provided below in Table 4.3.15.

Table 4.3.15: Key areas of financial statements risk

Source: ANAO 2021–22 audit results, and DVA’s audited financial statements for the year ended 30 June 2022.

Audit results

4.3.82 The following table summarises the status of audit findings reported by the ANAO in 2020–21 and 2021–22.

Table 4.3.16: Status of audit findings

Source: ANAO 2021–22 audit results

4.3.83 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that DVA’s 2021–22 financial statements were not materially misstated.

New significant audit finding

Military Compensation Scheme Provision Methodology

4.3.84 The Military Compensation Scheme (MCS) provision is assessed at the end of each financial year and recognises DVA’s liability in relation to the Military Rehabilitation and Compensation Act 2004 (MRCA) and the Safety, Rehabilitation and Compensation (Defence-related Claims) Act 1988 (SRCA). The calculation of the provision is complex and involves a number of key assumptions and judgements, including assumptions relating to future trends in medical costs, permanent incapacity, and inflation rates.

4.3.85 The ANAO noted that over the previous six years there has been a history of significant increases in the opening balance of the provision, though at a slower rate in 2021–22 compared to previous years. The ANAO formed the view that there is a significant risk that DVA’s initial valuation of the provision for 2021–22 may again be understated.

4.3.86 In response to the ANAO’s position on the value of the provision, DVA applied an additional risk adjustment of $3.6 billion to the value of the provision for the year ended 30 June 2022.

4.3.87 The ANAO’s review of the actuarial process in 2020–21 also resulted in several observations and opportunities for improvement. Additional observations have been raised in the 2021–22 highlighting opportunities to improve the methodology that underpins the MCS provision.

4.3.88 The ANAO recommended that DVA develops a centrally managed policy and procedures that details DVA’s role and responsibilities in respect of the valuation, including: details of data used each year and formal approvals by an appropriate level of management for changes in data used; documented risk assessments for key components of the estimation process including those relating to data, method and accounting components; selection of assumptions used each year including a robust analysis of the impact of changes in assumptions; and detailed accounting methodology and accounting treatments for various outcomes that may result in any year as a result of underlying changes in inputs. This overall process should have an appropriate level of executive approval.

4.3.89 In respect of the application of an additional risk adjustment prepared by management, the ANAO recommended that DVA develop a plan to consider: when a risk adjustment would be appropriate and how it would be calculated; an appropriate probability of sufficiency underlying the calculation of any risk adjustments; and the level of granularity of the payment categories assessed as part of the risk adjustment, and consistency with the actuary’s modelling.

New moderate audit findings

Security Governance – Monitoring Implementation of Controls

4.3.90 During the 2021–22 audit, ANAO noted deficiencies in the governance and monitoring controls implemented by DVA to provide assurance that processes are managed to address business risks and promptly detect when the controls are not operating as designed.

4.3.91 The exceptions noted by the ANAO included:

• terminated users who accessed DVA systems post-termination where the systems accessed is unknown, including a terminated user who was given permission to continue to access DVA’s systems rather than change the agreed termination date. This outcome was not shared with DVA’s Chief Information and Security Officer.
• an update to DVA’s personal benefits Consolidated Controls Framework, including an additional risk scenario, was scheduled for April 2022 but has not yet been finalised or provided to the ANAO. The ANAO’s testing also indicated that there is confusion as to which reports, including monthly or quarterly approval of all individuals with incompatible access, are critical for managing DVA’s business, and what evidence is to be retained;
• the starting point for user revalidations was found to be incomplete due to a misunderstanding as to how users gained access;
• a risk assessment performed by DVA in relation to password complexity referenced controls which are subject to open ANAO findings, being user access and revalidation controls; and
• draft closure packs, without senior management endorsement, were provided to the ANAO in 2021–22 in response to a number of moderate risk findings raised in the 2020–21 audit. The ANAO’s testing indicated that processes were not operating effectively to allow closure of these findings, which may have been identified when senior management validated the controls before endorsing these closure packs.

4.3.92 ANAO recommended that the department implement a governance and assurance framework to ensure that identified controls are being undertaken by the appropriate group at the appropriate time and in an appropriate manner; maintain the currency of documentation which links the controls in place to address DVA’s business risks, and address the individual deficiencies noted by the ANAO across a number of audit findings.

Personal Benefits – Incompatible Access Monitoring

4.3.93 DVA has identified a business risk that users are required to have access that would allow them to bypass segregation of duties application controls resulting from the Single Point of Contact service delivery model applied. There is a monthly user access revalidation performed by directors and a quarterly user access revalidation that is endorsed by the branch heads.

4.3.94 ANAO tested both the monthly and the quarterly revalidations of users with potentially incompatible access in the 2021–22. The controls were assessed as unreliable due to the number of errors identified through the ANAO’s testing.

4.3.95 ANAO recommended DVA initially formalise the requirements, including evidence retention obligations, in line with the revision of the Consolidated Control Framework, and share these requirements with those individuals responsible. DVA can then design and implement processes to enable management to gain assurance that these critical reports have been promptly and completely actioned, including by Services Australia when access modification is required. The status of this finding will be reviewed as part of the 2022–23 financial statements audit.

Resolved moderate audit finding

Financial Delegations in DOLARS

4.3.96 Financial delegations are a key part of DVA’s internal control framework and ensure appropriately skilled personnel perform key functions. As part of the 2020–21 financial statements audit, the ANAO identified that changes to delegations approved by the Secretary in February 2021 had not been implemented in DVA’s financial management information system (DOLARS) until July 2021. DVA advised the ANAO that it had developed a process to ensure future changes to delegation limits were updated in a timely manner.

4.3.97 During the 2021–22 audit, the ANAO validated that the financial delegations configured within DOLARS and the Purchasing Portal for departmental and administered funds are materially consistent with the Instrument of Delegation approved by the Secretary. All items tested were approve by an appropriate delegate. As a result, this finding was closed.

Unresolved moderate audit findings

Implementation of the Process Direct system

4.3.98 In November 2020, income and student support payment processing functions were transferred to the Process Direct system. The move to Process Direct was a component of the Veteran Centric Reform program.

4.3.99 During the final audit phase of the 2020–21 financial statements audit, weaknesses were identified in establishing appropriate security and data migration processes including key system roll-out documentation and performance of relevant testing for data migration. DVA confirmed that it would review cybersecurity governance, including the development and strengthening of appropriate security policies and clear guidance regarding the commissioning of new systems. DVA expected this work to be finalised by the end of June 2022.

4.3.100 A high-level action plan was provided to ANAO on 22 February 2022. While the details underpinning the plan appear to address the risks identified in the finding it was not supported by detailed procedures and processes. The ANAO will not be able to conclude on the proposed design of the remediation until the detailed procedures are finalised and implemented by DVA. As a result, this finding will remain open and will be considered as part of the 2022–23 audit.

Monitoring of high-risk activity in IT systems

4.3.101 DVA reviews all activities in IT systems that are classified as high risk or a potential indicator of fraud. A software tool identifies this activity for review. During the 2020–21 financial statement audit, the ANAO identified that after a major IT change was implemented, the tool in place to monitor high-risk activity in IT systems was no longer able to correctly identify high risk activity for review. 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. DVA also confirmed that it would ensure appropriate security and fraud considerations are strengthened for all future system development.

4.3.102 A high-level action plan was provided to ANAO in February 2022. The details underpinning the plan appears to be reasonable, the ANAO will not be able to conclude on the proposed design of the remediation until the detailed procedures are finalised and implemented. As a result, this finding will remain open and will be considered as part of the 2022–23 audit.

User Terminations

4.3.103 During the 2020–21 audit, the ANAO identified weaknesses in DVA’s controls relating to terminated users where a small number of terminated users had accessed DVA systems post-termination where investigation was not undertaken outside of client payment systems. 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.

4.3.104 During the final audit phase of the 2020–21 financial statements audit, DVA noted that it had introduced technology that enabled DVA staff to action terminations more effectively. The technology included automated notifications to Services Australia of upcoming cessations. DVA had also developed a process to identify, assess and investigate (where appropriate), any instances where system access post termination results in risk to DVA.

4.3.105 During testing, ANAO identified a number of systemic control failures relating to: unauthorised approval of system access post-termination; lack of investigation of activities performed post-termination, including any potential inappropriate sharing, downloading, or manipulation of confidential DVA information; and email accounts not checked for the forwarding of confidential or personally identifiable information outside of DVA. As a result, this finding will remain open and will be considered as part of the 2022–23 audit.

User Revalidations

4.3.106 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. During the 2020–21 financial statements audit the ANAO identified that DVA did not have a process in place to revalidate user access for seven systems that support the financial statements.

4.3.107 During the final audit phase of the 2020–21 financial statements audit, DVA confirmed it would review cybersecurity governance and security policies with a view to updating policies to provide clear guidance regarding user revalidation, specific roles and responsibilities. Management also noted that this would be supported by implementing protocols to ensure managers of staff with access to these systems are revalidating their need for access, based on a risk assessment, on a planned regular basis. The results will be reported to the business system owner.

4.3.108 DVA provided an updated response to this finding to the ANAO in July 2022, which confirmed that the revalidation process for two systems was not complete. Additionally, the ANAO identified further deficiencies in the revalidation process as a result of testing performed. As a result, this finding will remain open and will be considered as part of the 2022–23 audit.

QUASARS Claim File Population Reports

4.3.109 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.

4.3.110 The ANAO identified that DVA did not have any documented processes or procedures in place to confirm completeness, accuracy and relevance of information extracted from business systems and uploaded into QUASARS.

4.3.111 During the finalisation of the 2020–21 financial statements audit, DVA identified that it would review and document existing processes and develop a stronger protocol to ensure data uploaded is complete and accurate. DVA also noted that it would explore ways to automate the manual process moving forward.

4.3.112 During June 2022 DVA implemented several processes to address this finding. As these processes were not in place for the full financial year, the ANAO requested DVA perform additional procedures to provide assurance to both DVA and the ANAO that the absence of these controls for the full period did not materially impact the assessment of correctness and accuracy of claims for 2021–22 financial year. The ANAO performed audit procedures on these processes and was able to obtain sufficient and appropriate evidence to support the financial statements audit.

4.3.113 The ANAO will test DVA’s new processes to confirm that they have been embedded into standard operating procedures as part of the 2022–23 audit.

Emphasis of Matter paragraph

4.3.114 An Emphasis of Matter paragraph has been included in the 2021–22 auditor’s report to draw users’ attention to the accounting policies disclosed in the financial statements that describe the inherent uncertainty associated with a number of the assumptions used in the calculation of the Military Compensation Scheme provisions and to the sensitivity of the valuation of the provision to changes in these assumptions. This is considered to be a key audit matter (refer to Table 4.3.15) due to the complexity and use of judgement associated with the unique compensation arrangements arising under legislation.

Comments on unsigned non-material entities

4.3.115 As at 2 December 2022, the following financial statement audits for the year ended 30 June 2022 were still in progress:

• Royal Australian Navy Central Canteens Board (RANCCB);
• Royal Australian Air Force Welfare Trust Fund; and
• Army and Air Force Canteen Service (AAFCANS).

4.3.116 A number of emerging issues have been identified across these entities and have resulted in delays in the finalisation of the audit. The Auditor-General’s 2022–23 Interim Report on Key Financial Controls of Major Entities expected to be tabled in June 2023 will include a summary of the results for these audits.

4.3.117 These entities provide a range of services to Defence service personnel including concessional loans and grants, discounted accommodation to retired veterans, holiday and recreational facilities to current and former Defence personnel, and the provision of canteen services on Defence bases. The entities are corporate Commonwealth entities, separate from the Department of Defence, which operate under a range of structures including as Body Corporates, Trusts and Companies. Their Accountable Authority is the Board appointed by the Chief of the Defence Force and/or the Chiefs of Army, Air Force and Navy. Most of the Board members are serving Defence personnel.

Comments on other non-material entities

Royal Australian Air Force Veterans’ Residences Trust

4.3.118 The RAAF Veterans’ Residences Trust was established to provide residences to former members of the Air Force and their families who are in need. The Trust has acquired 76 residences throughout Australia and is self-funded.

Audit results

4.3.119 The following table summarises the status of the audit finding reported by the ANAO in 2020–21 and 2021–22.

Table 4.3.7: Status of audit finding

Source: ANAO 2021–22 audit results.

New moderate audit finding

Independence of audit committee members

4.3.120 The ANAO identified the Trust has one Audit Committee member who is a Trustee. Under Commonwealth legislation, Trustees have both management and governance responsibilities. Due to the size of the Trust, decision-making functions usually undertaken by employees of the entity are performed by the Board of Trustees.

4.3.121 Further, the Trust has no internal audit function. An internal audit function contributes to corporate governance by providing an entity’s Accountable Authority and audit committee with independent reviews of, and suggestions for, improving the design and operation of the entity’s financial and non-financial control environment.

4.3.122 The lack of independence between management, the audit committee and the Board of Trustees presents a governance risk as the Board are performing all functions that would usually be split between these roles.

4.3.123 A governance risk may result in inadequate and poorly designed systems of internal control, risks around the financial and performance reporting undertaken by the entity, and non-compliance with relevant laws and regulations. The likelihood of this risk occurring is further increased by the absence of any independent oversight through an internal audit function.

4.3.124 The Trust acknowledged the finding and advised that governance risk, formally identified in its risk register, is subject to ongoing review. The Board is examining further controls that can be put in place to mitigate this risk.

Royal Australian Air Force Welfare Recreational Company

4.3.125 The Royal Australian Air Force Welfare Recreational Company (the Company) was established in 1972 to manage and promote recreational facilities for RAAF members, their families and other eligible persons and to provide financial support to and assist in the provision of recreational amenities and services to RAAF members. As Trustee, the Company achieves its purpose through management of the RAAF Central Welfare Trust Fund. The Company is subject to the Corporations Act 2001.

Audit results

4.3.126 The following table summarises the status of the audit finding reported by the ANAO in 2020–21 and 2021–22.

Table 4.3.8: Status of audit finding

Source: ANAO 2021–22 audit results.

New significant legislative breach

Alterations made to the signed financial statements after the auditor’s report was issued

4.3.127 During the 2021–22 audit, the ANAO identified that the Company had made changes to its audited 2020–21 financial statements, and had published an altered version of the financial statements, which were re-signed on the 6 October 2021, with the auditor’s report that was issued on the 29 September 2021. The ANAO identified that the following significant changes were made to the financial statements:

• a change to the directors’ declaration – originally signed on 28 September 2021 but changed to 6 October 2021;
• a change to the signatories who signed the directors’ declaration;
• the removal of the declaration that the financial statements complied with the Australian Charities and Not-for-profits Commission Act 2012;
• the insertion of a new director who commenced in July 2021 (after the end of the reporting period) into the Key Management Personnel note disclosure; and
• the inclusion of an additional note disclosing gender and staff location of personnel, that was not subject to audit.

4.3.128 The changes to the financial statements are a breach of section 97 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and section 301 of the Corporations Act 2001.

4.3.129 In addition, the directors did not pass a valid resolution to issue the financial statements, and did not lodge its annual report with the Australian Securities and Investments Commission also resulting in breaches of the Corporations Act 2001.

4.3.130 The ANAO has requested the Company take corrective action to remove the altered version of the 2020–21 financial statements from public access, to advise the Australian Charities and Not-for-profits Commission and the Australian Securities and Investment Commission (ASIC) of the error, and to table a correction in Parliament.

4.3.131 The 2020–21 financial statements published with the auditor’s report dated 29 September 2021 should not be relied upon due to the significance of the changes made to the financial statements, and because the financial statements were not properly authorised for issue under the Company’s constitution.

Emphasis of Matter paragraph

4.3.132 The Company re-signed its 2020–21 financial statements to the ANAO for audit on 30 November 2022. The ANAO issued its auditor’s report in relation to the 2020–21 financial statements on 30 November 2022. The auditor’s report included an Emphasis of Matter paragraph referring to the disclosures in the re-presented financial statements drawing attention to the errors in the altered financial statements that were originally signed on 6 October 2021. The Emphasis of Matter paragraph stated that the auditor’s report dated 29 September 2021 should not be relied upon.

Other Matter paragraph

4.3.133 The 2021–22 auditor’s report included an Other Matter paragraph drawing attention to the altered 2020–21 financial statements, and noted that the 2020–21 financial statements had not been authorised for issue by the Accountable Authority as the resolution passed by the directors was not valid in accordance with the Company’s constitution. The Other Matter paragraph stated that the auditor’s report dated 29 September 2021 should not be relied upon.

Royal Australian Navy Relief Trust Fund

4.3.134 The Royal Australian Navy Relief Trust Fund (the Fund) was established to provide welfare assistance to current and ex-serving members of the Navy and their families. Assistance is provided through the provision of 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 has been met. In accordance with the Services Trust Funds 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

4.3.135 Table 4.3.17 below summarises the status of the audit findings reported by the ANAO in 2020–21 and 2021–22.

Table 4.3.17: Status of audit findings

Source: ANAO 2021–22 audit results.

Resolved significant legislative breach

Related party transaction

4.3.136 In accordance with the Services Trust Funds Act 1947, a person who is a Trustee or a dependant of a Trustee of any fund shall not receive benefits from the Fund. During 2020–21, the ANAO identified that a loan including an administration fee had been made to a related party in contravention of section 14 of the Services Trust Funds Act 1947. The ANAO recommended that the Fund strengthens its policies and procedures to prevent any payments being made in contravention of legislative obligations.

4.3.137 During 2021–22, the Fund recovered the outstanding loan balance. The Fund has confirmed that no other loans have been made to personnel with a potential benefit to a Trustee, In addition, the Fund has strengthened its processes to prevent loans being made to a Trustee or their dependant. This matter has been resolved.