Introduction

A trust is a legal arrangement involving the holding and management of property by one party (the trustee) for the benefit of another (the beneficiary), or for a charitable or statutory purpose.

Monies held in trust by Australian Government entities¹ are subject to trust law and accepted accounting principles for the treatment of public sector monies. Monies held in trust are required to be reported in annual financial statements.

Audit scope and objectives

The audit was conducted at five entities that were operating under the provisions of the Commonwealth Authorities and Companies Act 1997 (CAC Act), and which had identified trust monies in their financial statements in 2002-03 and 2003-04. These entities held approximately 10 per cent ($16 million) of the total balance of trust funds reported by CAC Act entities at 30 June 2004. The entities were the Australian National Maritime Museum, the Australian Nuclear Science and Technology Organisation, Comcare Australia, the National Gallery of Australia, and the National Library of Australia.

The objectives of the audit were to:

• assess whether the selected entities were managing trust monies in accordance with legal and administrative requirements and better practice principles;
•  identify better practice in the management of trust monies; and
•  as necessary, recommend improvements in the controls and practices relating to the management of trust monies.

This audit was conducted as a follow-on from a previous audit of trust monies that was reported in Audit Report No.18, 2002-03. The earlier audit focussed on trust monies that were maintained principally under the provisions of the Financial Management and Accountability Act 1997.

Audit conclusions and findings

The ANAO concluded that all of the audited entities had the legislative authority to accept and manage trust monies and that they were generally managing those monies in accordance with legal and administrative requirements and better practice principles. However, some monies that were not held on trust were managed as trust monies by two entities, and reported as such, in the entities' annual financial statements. Also, trusts comprising gifts and bequests (which were trusts held for charitable purposes) were not reported in a consistent manner, in that they were reported under the provisions of three different financial reporting policies by the three entities that held such trusts.

The ANAO considers that entities need to seek legal advice where they are uncertain about the correct status of monies so that both trust monies and other forms of money are appropriately managed, and properly reported in entities' financial statements. In addition, where entities hold trusts comprising gifts and bequests that are for the purposes of the reporting entity, the trusts should be reported as controlled entities in the reporting entity's financial statements, as provided for by Australian Accounting Standard, AAS 24 Consolidated Financial Reports. The Department of Finance and Administration (Finance) supports this position and advised that although there is existing guidance by way of Australian Accounting Standards and Finance Minister's Orders, it would provide additional guidance to assist financial report preparers.

The ANAO found that each of the audited entities had generally implemented a suitable administrative framework for the management of trust monies. However, there was scope for most of the entities to consider the treatment of trust monies in risk assessment processes and to enhance their policies and procedures.

The ANAO also found that some entities were mixing trust monies with other trust monies or entity monies for banking and/or investment purposes. Approximately $1.5 million of trust monies were mixed in this way. While each of these entities maintained separate accounting records for each of the relevant trusts, legal advice obtained by the ANAO indicated that the entities were technically in breach of their duty as trustee ‘not to mix trust funds with other monies'. The legal advice was based on recent case law and varied from advice obtained previously that had indicated that the maintenance of separate accounting records would suffice. Based on this advice, entities should maintain a separate bank account and separate investments for each trust fund that they hold, unless authorised to do otherwise by law or the trust instrument.

The ANAO recognises that the maintenance of a separate bank account and separate investments for each trust fund can have administrative and financial implications for entities that hold multiple trusts funds and impact on the rate of return that is obtained on the investment of trust monies. Entities therefore need to be alert to the potential cost and other implications involved in accepting the responsibility of being trustee, and give appropriate consideration to ways of effectively managing these implications.

The ANAO also identified that some entities had adopted a practice of using entity funds to meet trust fund expenses, and subsequently obtaining reimbursement from the trust fund. While this practice is legally available to CAC Act entity trustees, the ANAO considers that, based on legal advice obtained, trustees should maintain an operating balance of trust funds in the trust bank account for the payment of all trust expenses as they fall due.

Recommendations

The ANAO has made five recommendations designed to strengthen Australian Government entities' administration of trust monies and compliance with trust law.

The five entities examined in the audit agreed with the recommendations. In addition, Finance responded positively to the audit report.²

Footnotes

1 Except where otherwise specified, the term ‘entities' is used generically throughout this report for all Government organisations, including departments and agencies operating under the Financial Management and Accountability Act 1997 and statutory authorities and companies operating under the Commonwealth Authorities and Companies Act 1997. Departments and agencies operate through the Official Public Account and do not constitute separate legal entities.

2 Entities' comments are provided in the relevant section of the report to which they refer or in Appendix 1.