Background

The Department of Families, Community Services and Indigenous Affairs (FaCSIA) provides funding under many programmes to facilitate social outcomes and benefits to the Australian community. These programmes typically fund non-government organisations to deliver services that contribute to such outcomes and benefits. In 2004–05, FaCSIA provided over $1 billion in funding for family and community services, delivered by almost 16 000 service providers.

Funding for communities and community organisations is primarily directed towards five groups of programmes, which account for 93 per cent of this expenditure. These groups include:

• support for people with a disability-which provides employment assistance and other services;
• family support-this includes child abuse prevention, grants to family relationships support organisations, early childhood and family initiatives under the Stronger Families and Communities Strategy, and services for families with children;
• community support-this includes emergency relief funding and community initiatives under the Stronger Families and Communities Strategy;
• child care support-which mainly comprises direct subsidies to child care providers; and
• youth and student support-this includes assistance to young people to overcome barriers to social and economic participation.

FaCSIA uses a variety of arrangements to fund providers to deliver family and community services. These arrangements include grants and subsidies, and other related funding arrangements, such as case-based funding and funding according to milestone events. These arrangements place differing obligations on service providers in relation to delivering services for which they have been funded. The arrangements also provide FaCSIA with differing mechanisms and capacities to address poor performance by service providers. For ease of reading, this audit refers to all these types of funding arrangements as grants.

Family and community grants fund a diverse range of services, but generally cater for those in the community with greater need for economic, social and physical support. A large number of services are provided in rural and remote areas, including to Indigenous people. In these areas, there are often few organisations capable of providing appropriate community and family services. However, many services are delivered in metropolitan and regional areas where there are numerous providers willing and able to provide services. These social welfare service providers are often very reliant on government funding for their financial viability.

Audit approach

The objective of the audit was to assess whether FaCSIA administers grants effectively, according to better practice guidelines, and consistently across geographic areas and the range of programmes included in the scope of the audit.

The scope of the audit included grants administered by FaCSIA¹ between 1 July 2002 and 30 June 2005, relating to programmes falling within four of the five groups of programmes providing funding for families and communities namely: Community Support; Family Assistance; Childcare Support; and Youth and Student Support². In total, these groups involved total expenditure of some $533 million in 2004–05.

The audit focussed on:

• whether FaCSIA executed adequate funding agreements for the grants included in the ANAO's sample. It assessed whether FaCSIA used the correct type of funding agreement, with appropriate terms, conditions and deliverables. It also examined risk management practices FaCSIA applies to its funding agreements;
• FaCSIA's financial management of funding agreements, including accuracy of payments made, financial acquittals, adequacy of payment and financial management systems, and compliance with key elements of finance legislation; and
• FaCSIA's monitoring of service provider progress in fulfilling the requirements of funding agreements, and the adequacy of internal and external performance reporting mechanisms for programmes that have substantial funding agreements.

The audit did not examine FaCSIA's processes to promote grant programmes, manage applications, and appraise, select and notify recipients of grants. These issues will be addressed in a separate audit the Australian National Audit Office (ANAO) is currently conducting and expects to table in the Spring 2006 Parliamentary Session.

Criteria for the audit assessment were drawn from the ANAO 2002 Better Practice Guide, Administration of Grants. To collect information against these criteria, the ANAO drew a broadly-based sample ³ of 102 grants from the four groups of FaCSIA programmes included in the scope of the audit. Fieldwork for the audit was primarily undertaken between July 2005 and November 2005, with some follow-up work carried out in March and April 2006. In addition to interviewing relevant officers from FaCSIA's State and Territory and National offices, the ANAO also interviewed personnel from 26 of the 102 service providers in the sample, and a representative of a social welfare peak body.

During and subsequent to the ANAO's audit fieldwork, FaCSIA was undertaking a number of initiatives to improve its administration of grant programmes. These initiatives included the implementation of the FaCSIA Online Funding Management System (FOFMS^)4, enhancements to FaCSIA's performance management framework, and improving programme management guidance to FaCSIA staff as part of the new FaCSIA Service Delivery Framework⁵. In addition, FaCSIA commenced a major business process re-engineering project for community based programmes in November 2005 and is now working towards implementing process changes across the department.

The ANAO considers that these initiatives have the potential to considerably improve FaCSIA's administration of grant programmes. However, given that many of these initiatives were either commenced or largely implemented after audit fieldwork, the audit could not assess their impact.

Overall audit conclusion

FaCSIA administers a large number of relatively small grants to a wide range of service providers. Many of these organisations are in the charitable, broader social welfare or volunteer sectors. To cater for this breadth of service delivery, FaCSIA focuses on using local knowledge garnered through its network of State and Territory offices, and knowledge held by its National office, to manage associated funding agreements. Recognising that the majority of these service providers rely on government funding for financial viability, FaCSIA has placed a strong emphasis on making timely payments.

The audit identified considerable scope for FaCSIA to improve grant administration processes and practices. These opportunities primarily relate to enhancing controls over grant payments, better monitoring and reporting the performance of grant providers and programmes, and ensuring that FaCSIA enters into funding agreements that have appropriate terms, conditions and performance requirements.

At the time of audit fieldwork, FaCSIA was unable to compile comprehensive information relating to its grant programmes. This necessarily constrained programme management and the department's ability to compile accurate information in a timely manner for its Annual Reports and other accountability documentation.

The audit also identified considerable divergence in grant management processes and practices between FaCSIA's National, State and Territory offices and across its various programmes.

Improving these major elements of grant management, and the consistency of approaches between FaCSIA's State and Territory offices and across its broad range of programmes, has the potential to enhance the quality and effectiveness of services delivered by providers on behalf of FaCSIA. It is also likely to improve the financial integrity of grant programmes by ensuring services are being provided for agreed purposes and to the required standard.

FaCSIA recognised the importance of improving its grant administration and the need to ensure consistent practices for management of the department's arrangements with service providers across all community programmes. The department commenced a major information technology project in February 2004 to design, develop and implement an integrated solution for the department's funding management requirements. The staged release of FOFMS commenced in 2004–05 with two releases involving FaCSIA staff and Disability Employment Assistance Business Service providers. Further releases occurred during 2005–06, to enable all FaCSIA community programmes to progressively move to use the system over this period.

The ANAO considers that the full implementation of FOFMS, the new FaCSIA Service Delivery Framework, and the business process re-engineering project currently underway have the potential to support significant improvement in FaCSIA's management of some $1 billion per annum in grants. The ANAO notes that these initiatives represent a significant undertaking, which will require resources and commitment across the department if it is to deliver on improving the management of programmes and address the risks and issues identified in this audit.

As FaCSIA administers a large number of relatively small grants, an effective risk management approach is fundamental to facilitating efficient and effective service delivery. FaCSIA could improve its risk management practices when monitoring service provider performance and acquitting payments. While FaCSIA's recent fraud control plans have included strategies to mitigate fraud associated with its grant programmes, FaCSIA could enhance practices to prevent and identify fraud, including through IT enhancements and in the course of implementing recommendations flowing from the business process re-engineering project.

Key findings

Fundings Agreements (Chapter 2)

It is important that FaCSIA enters into appropriate funding agreements with service providers funded under grants programmes. If these agreements are not appropriate, for example not being in place at all, using the wrong type of agreement ⁶ or with insufficient terms, conditions and deliverables, then FaCSIA may face difficulties in ensuring that the required services are provided.

The ANAO found that appropriate funding agreements were in place for almost all grants included in the ANAO sample, with only three of the seven Emergency Relief Programme grants deficient. FaCSIA has undertaken action to address this issue with new funding agreements for all Emergency Relief Programme grants put in place from 1 July 2005. In addition, the department advised the ANAO in January 2006 that it is seeking to have appropriate agreements in place for all programmes going forward.

For most funding agreements examined by the ANAO, FaCSIA had used the appropriate type of agreement contract form, which included appropriate terms and conditions. However, the audit identified weaknesses in FaCSIA's monitoring of service providers' compliance with requirements included in funding agreements relating to adequate insurance coverage. The ANAO also found that there is scope for FaCSIA to improve schedules to the agreements, particularly to more clearly and fully specify project budgets.

FaCSIA has implemented an integrated risk management approach that included grant programme administration. However, there was little evidence on the files for the grants in the ANAO's sample that FaCSIA used a risk approach to the management of individual grants and funding agreements.

Financial Management (Chapter 3)

Sound grant management requires payments to service providers to accord with the specifications of individual funding agreements, comply with relevant financial legislation, be subject to effective acquittal processes and controls, and be undertaken efficiently.

FaCSIA's new FOFMS system had yet to be fully implemented at the time of the ANAO's audit fieldwork, and the ANAO did not find adequate management information systems that readily matched financial information with funding agreement information for internal management purposes. The absence of these systems made it difficult for FaCSIA to provide adequate information relating to grants and funding agreements to external entities, including the ANAO.

At the outset of this audit, the ANAO requested FaCSIA to list all funding agreements and grants in recent years, by dollar value, categorised by programme and sub-programme. It took FaCSIA approximately three months to manually extract and collate relevant information, which was eventually provided at a lesser level of detail than originally requested—in that the value of grants were not reported at the sub-programme level.

FaCSIA advised that to respond to the ANAO's information request in full would have been too labour intensive and taken too long. Further, FaCSIA was not able to assure the ANAO that the information provided to the ANAO comprised the entire grants population in the scope of the ANAO's audit. Given this, it is not clear to the ANAO how FaCSIA was able to assure the accuracy of information on grants and funding agreements reported by FaCSIA in Annual Reports and other accountability documentation.

FaCSIA advised the ANAO in April 2006 that the introduction of FOFMS is expected to provide FaCSIA with a strong capacity to provide accurate aggregated performance information relating to grants and funding agreements.

The ANAO undertook an exercise to match actual payments to service providers against the financial specifications of 100 grants in the ANAO's sample⁷. The ANAO confirmed that FaCSIA made correct payments for 81 per cent of the sample of grants. However, 10 per cent of the sampled grants had inaccurate payments and the remaining nine per cent comprised payments that could not be readily reconciled with the funding agreements. This finding casts doubt on the overall accuracy of payments for grants and funding agreements, and the adequacy of FaCSIA's acquittal procedures.

The ANAO found that FaCSIA often did not apply adequate financial control practices when acquitting payments. In particular, FaCSIA records contained adequate audited financial statements for only nine per cent of the 76 long-form funding agreements⁸ in the ANAO's sample. No audited financial statements were received for 36 per cent of sampled funding agreements. Where audited financial statements had been received, 55 per cent did not adequately report funding expenditures, and in some instances did not provide assurance that service providers had met milestone deliverables before FaCSIA made payments.

While 94 per cent of the sampled grants and funding agreements had some information on file related to whether the service provider met performance requirements over the sample period, there was little evidence that indicated that FaCSIA had used this information as part of the acquittal process.

Given the magnitude of the total expenditure on funding for communities and community organisations and the large number of service providers involved, it is important that FaCSIA takes effective measures for the prevention, identification and investigation of fraud associated with these programmes.

However, the ANAO found that FaCSIA is not adequately addressing fraud risks related to grants and funding agreements identified in its fraud control plan. The ANAO considers that FaCSIA's implementation of effective fraud control could be improved by ensuring that key fraud control mitigation strategies contained in its current fraud control plan are effectively implemented. These strategies include using effective funding agreements and applying sound financial acquittal practices; providing relevant staff with fraud awareness training; and undertaking appropriate fraud identification initiatives.

For around two-thirds of the ANAO sample of funding agreements, authorisation for the expenditure involved should have been obtained from the Finance Minister, or an appropriate delegate within FaCSIA, in order to satisfy the requirements of Regulation 10 of the Financial Management and Accountability Regulations 1997 (FMA Regulation 10). However, for only nine agreements, or 12 per cent of sampled agreements to which FMA Regulation 10 applied, was evidence on file that such authorisation had been provided.

Monitoring and Reporting Performance (Chapter 4)

Monitoring the performance of service providers is an important component of the administration of funding programmes, as an encouragement to service providers to adhere to agreement requirements and better achieve the objectives of the funding programme.

The ANAO found that FaCSIA did not attempt to effectively target the limited resources the department had available for monitoring the performance of providers. Together with a lack of appropriate national guidelines on performance monitoring, this contributed to inconsistent performance monitoring procedures instituted in the various State and Territory Offices.

A high quality performance information framework allows funding programme administrators to gauge the success of their programmes and effectively target the allocation of resources. Such a framework also contributes to public accountability for the public funds involved.

The ANAO recognises that FaCSIA's grants and funding programmes contribute to social outcomes that benefit the Australian community. However, the absence of an effective performance information framework restricts FaCSIA's capacity to demonstrate the extent of these contributions, and effectively target the allocation of resources.

Subsequent to audit fieldwork, FaCSIA has undertaken a number of reforms aimed at improving its performance management framework. The ANAO considers that these reforms have the potential to deliver useful performance information. However, to have the desired impact, these reforms must be supported, over time, by the inclusion in funding agreements of requirements for better performance information, especially relating to indicators of effectiveness.

Recommendations

The ANAO identified further opportunities for improvement in FaCSIA's administration of funding for communities and community organisations and made eight recommendations that address improving:

• the execution of funding agreements;
• funding agreement acquittals and broader financial management; and
• monitoring grant recipients and reporting the performance of grant programmes.

FaCSIA Response

The Secretary of the Department of Families, Community Services and Indigenous Affairs provided the following summary response to the audit findings.

FaCSIA agrees with the ANAO recommendations and was already taking steps to address many of the issues of concern to the ANAO. FaCSIA is currently implementing a new online departmental grants system and is undertaking a major, business process re-engineering project to establish consistent processes for managing funding agreements across programmes and locations. A specific Programme Operations Group has now been established to devise and oversight these changes which will ensure the provision of consistent advice and support to staff and improved processes and practices.

Footnotes

1 Until 24 January 2006, this department was known as the Department of Family and Community Services. Following changes announced by the Prime Minister on 24 January 2006, the Office of Indigenous Policy Coordination became part of the new Families, Community Services and Indigenous Affairs portfolio. This report refers to the department by its new name (FaCSIA), except where quoting documents produced by the former Department of Family and Community Services.

2 This audit excludes disability services. ANAO Audit Report No. 14 2005–06, Administration of the Commonwealth State Territory Disability Agreement examined services relating to the accommodation, care and participation in the community of people with a disability. The Support for People with a Disability group of programmes provides employment assistance and often other services to people with a disability. In 2004–05, this group of programmes accounted for around half of the $1 billion in expenditure on communities and community organisations. Given the magnitude of this programme group, the ANAO concluded that this area of FaCSIA administration would be better addressed in a separate audit of disability employment services. Accordingly, the Support for People with a Disability group of programmes was excluded from the scope of the audit.

3 The objective of the sample was to provide an indication of grant management across FaCSIA as a whole. The sample size was not sufficient to assess the overall effectiveness of the management of each of the programmes sampled. Therefore, issues identified in the sample may not reflect on the entire programme.

4 FOFMS is a software system for grants that tracks financial information and is also intended to link financial information with the terms and conditions of funding agreements.

5 This framework is intended to provide the basis for FaCSIA to undertake its service delivery activities in a consistent manner. It highlights the need to focus on outcomes, not just inputs and outputs, and encourages transparent practices and supports accountability. The framework consists of high level service delivery principles and programme management standards.

6 The type of agreement refers to FaCSIA's three standard form agreements?minimalist, short-form, and long-form.

7Two of the 102 grants in the ANAO's sample were new, and did not involve payments in the audit period (1 July 2002 to 30 June 2005).

8 FaCSIA requires that grant funding to service providers be subject to funding agreements. In order to place obligations and accountability on service providers appropriate to the risks and administration costs associated with the particular grant, FaCSIA has developed three types of funding agreement templates—a long-form agreement, a short form agreement and a minimalist agreement.