Background

This audit examines aspects of financial management in the Health Insurance Commission (HIC). It has a particular emphasis on the financial framework and systems and their ability to assist managers to make informed decisions on the efficient and effective use of resources. The ANAO has made six recommendations to assist the HIC to meet its financial management objectives.

In recent years, the Commonwealth Government has reformed financial management in the Commonwealth public sector in order to improve stewardship and accountability. Legislation places responsibility for the efficient, effective and ethical use of resources on the directors of Commonwealth authorities and companies and on the Chief Executive Officers (CEOs) of departments and agencies. In order to discharge their responsibilities, they need to ensure that their organisations have a level of financial management that assists their managers to use resources efficiently and effectively. This audit examines the response of the HIC to these reforms.

The HIC is a statutory authority, created under the Health Insurance Commission Act 1973, within the Health and Ageing Portfolio. It was established to administer what has become Australia's universal health insurance scheme, Medicare. The HIC also administers many other health-related programs on behalf of the Commonwealth Government.

The HIC processed 221.4 million services in 2002–03, involving $8.1 billion in Medicare benefits. In the same year, it also processed 174 million services, involving $5.2 billion in benefits paid under the Pharmaceutical Benefits Scheme (PBS) and Repatriation Pharmaceutical Benefits Scheme (RPBS). These two programs and the 30 Per Cent Private Health Insurance Rebate program are the major programs administered by the HIC. They accounted for more than $15.5 billion of the $16.6 billion in payments made by the HIC in 2002–03.

Commonwealth health initiatives involve financial and operating approaches which acknowledge that agencies, such as the HIC, are accountable for the delivery of selected government programs supported by an appropriate administration infrastructure – both in terms of capital and operating funds. Of significance is whether the financial management approaches adopted are based on sound financial structures. An important consideration is how those structures align to, and are considered in, the entities' resource allocation processes, both in administering and delivering government programs. This, however, was not the focus of the audit. Rather, the focus was whether the financial framework and processes of the HIC provided an adequate basis for coming to an informed conclusion on the major overriding issue.

The audit objective was, therefore, to examine the effectiveness of the HIC's internal control structures, as well as its financial management framework and processes, in order to form an opinion on their ability to support HIC Commissioners and managers in making informed decisions on the proper use of Commonwealth resources. To form the opinion, the ANAO examined whether the HIC's:

• internal control structure and environment are sufficiently adequate to provide Commissioners with assurance that the resources allocated to the HIC are managed efficiently and effectively; and whether the
• financial management framework, systems and reports are adequate to assist Commissioners and managers to efficiently and effectively manage the resources for which they are responsible.

The audit comments on the ability of financial management in the HIC to support managers in their work. The audit does not comment on the finances of the HIC and is not designed to provide an opinion on the HIC's financial position. This is done in the context of the HIC's annual financial statements.

Key findings

Does the HIC have a Robust Internal Control Structure and Control Environment?

Further enhancement is required before the ANAO could consider the HIC's internal control structure and control environment to be fully reliable and sufficiently comprehensive for management and audit purposes.

The ANAO found that, while the HIC's internal control structure and control environment have improved in recent years, they cannot yet be considered robust and fully reliable. In the ANAO's opinion, too many financial management issues are being raised by the ANAO, as external auditors, rather than being internally identified and attended to by management. As part of the audit of the HIC's 2002-03 financial statements the ANAO raised a new high risk ‘A' issue and nine new control ‘B' issues¹.

Further, while advice to the Commissioners on risks has improved since 2000, the HIC needs to ensure that advice on the risks associated with new or existing programs addresses all aspects of risk, including operational and financial risks. Until this occurs, the HIC's control environment is not providing Commissioners with an adequate level of assurance that financial risks, particularly for new programs, are being properly identified and adequately addressed. This observation covers both insurable and non-insurable risk.

While Commissioners are presented with a useful range of data, the ANAO has identified opportunities to improve the utility of reports to Commissioners.

The ANAO noted that there is a useful range of data provided to Commissioners to allow them to monitor the HIC's financial position. However, both this report and the ANAO's audit of the HIC's 2002–03 financial statements identified opportunities, and made recommendations, for further improvement in financial management reporting to Commissioners.

The HIC has made good progress in developing a culture of stewardship and accountability.

The ANAO has concluded that the HIC has made good progress in developing a culture of stewardship and accountability amongst its managers. However, ANAO observations indicate that further work is required to ensure that stewardship and accountability is integrated into everyday management for managers at all levels.

Does the HIC have an appropriate financial management framework in place?

Although the HIC has put in place a sound financial management framework, documentation and communication of financial management responsibilities needs further attention to be fully effective.

The HIC's financial management framework is consistent with good practice and provides a sound structure for the attainment of its objectives. However, the ANAO found during the course of the performance audit that, while various documents exist in the HIC which identify different components of the HIC's financial management framework and relevant responsibilities, no single overriding strategic document, which clearly sets out the context, nature and requirements of financial responsibilities of the HIC's Commission, managers and staff, was readily available for that purpose. Absence of such a documented reference poses a risk to the HIC, as those with financial responsibilities, including those new to such roles, may have a differing understanding of responsibilities and associated requirements and may not perform all activities required of such roles. This is important both for awareness and for accountability for performance.

Overall, the HIC has identified its financial management risks and taken adequate steps to manage them.

The HIC implemented a revised approach to risk management during 2002. Financial risks to the HIC are outlined in the Corporate Risk Management Plan and in the Finance and Planning Division (FPD) Risk Management Plan. Risk management plans, which include financial risks where appropriate, have been developed at Division, State and lower levels within the HIC. However, there needs to be closer integration between operational risk assessments and financial risk assessments, particularly for new programs.

Are HIC managers provided with financial data that is relevant, accurate and timely?

Overall, the financial data provided to HIC managers is relevant and accurate and is used by them to support their decision-making.

HIC reports contain both financial and non-financial performance data. The financial data in reports is sourced from FINNET² and is the primary source of data used by HIC managers to meet their financial management responsibilities. It is widely used by these managers and is considered by them to be directly relevant to their needs. The HIC produces Whole of Government reports and the Executive Business Report to the Commission within a tight timeframe that is consistently met. However, the timeframe for delivery of Divisional and State monthly financial reports to HIC managers, at 15 days after the end of the month, is slow compared to that of other public sector organisations.

Financial data is appropriately presented and delivered to HIC managers.

The HIC makes use of both financial and non-financial data in preparing budgets, reporting and monitoring performance. Financial data is presented to HIC managers in a form that is clear, understandable and in accordance with their financial management needs. However, there is scope to streamline the Monthly Financial Report and better explain actions taken to manage budget variances.

While the HIC has identified its managers' financial data requirements, consultation with managers has been limited.

The HIC has identified the requirements of managers and other users of financial data and taken steps to meet their needs. However, consultation with users about their data needs has been limited. FPD has developed initiatives to improve consultation with users on their needs. Financial data is generally considered by HIC managers to be readily accessible and able to be delivered in accordance with their financial management requirements.

The data produced by the HIC's FMIS is accurate and reliable.

The financial data provided by FINNET is sufficiently accurate and reliable to meet the financial management responsibilities and needs of line managers. However, there is only limited documentation on the interfaces (links) between the HIC's Financial Management Information System (FMIS) and associated business systems. This presents a risk that critical processes required to ensure that FMIS data are complete may not be correctly followed, resulting in the loss, or corruption, of data.

Do the HIC managers and staff have the required skills, training and support to use financial data?

Generally, fi nancial staff have appropriate skills and experience. Senior operational managers have a good understanding of their financial responsibilities, but the understanding of less senior staff could be enhanced.

Generally, the HIC's financial staff, including financial staff in divisions and in State offices, have appropriate skills and experience. Amongst non-financial staff, senior managers have a good understanding of their financial responsibilities. At less senior levels, a significant proportion of staff indicated that their understanding could be better. The HIC provides financial management training and other support to its staff.

FPD is not involved in the recruitment of Divisional Finance Coordinators and State Finance Managers.

A risk to the HIC identified by the ANAO was the lack of FPD advice on, or involvement in, the recruitment of Divisional Finance Coordinators and State Finance Managers. Unless FPD is involved in recruitment for these positions, there is a risk that staff without appropriate skills, understanding and experience could be recruited.

Financial training needs are assessed and financial management training is provided within the HIC.

The HIC provides financial training to staff at all levels. The HIC has developed systems and tools to assist in assessing financial training needs and in providing financial training. Many of the supporting tools were introduced during 2003. The HIC should ensure that they are fully implemented.

Managers and staff are well supported in using, analysing and interpreting financial data.

The HIC's FPD provides managers and staff with a comprehensive range of financial support services, including a FPD intranet site, Help Desk and annual workbook. FPD also provides information sharing forums (monthly and annual or bi-annual), one-to-one assistance to staff members who require specific help, and technical accounting and policy advice to HIC managers and staff as requested.

Overall audit opinion

In the ANAO's opinion, the HIC's internal control structures and environment, as well as its financial management framework and processes, have improved in recent years. However, they need further enhancement before they could be assessed as fully supporting the HIC's Commissioners and managers in making informed decisions on the proper use of Commonwealth resources.

The ANAO found that, while the HIC's control environment has improved, it is not yet providing Commissioners with a sufficient level of assurance that financial risks are being properly addressed and adequately managed, particularly for new programs. The number of issues found in the 2002-03 audit of the HIC's financial statements (one ‘A' and nine ‘B' findings) was a factor in the ANAO concluding that the HIC's information systems and control procedures required further improvement. The ANAO has made recommendations to address these issues as part of the financial statement audit. A summary of these recommendations is included as Appendix 3 to the report.

The HIC has developed a financial management framework that is consistent with good practice and provides a sound structure for the attainment of its objectives. However, it needs to ensure that all of its managers, at all levels, have a good understanding of their role within the framework.

The HIC produces Whole of Government reports and the Executive Business Report to the Commission within a tight timeframe that is consistently met. The HIC's managers are generally provided with relevant and accurate financial data, which they use in decision-making. However, timeliness of the reports provided to managers should be improved. There is also an opportunity to streamline the presentation of data in reports to make them more effective. Limited documentation of the interfaces (links) between the HIC's FMIS and associated business systems presents a risk to the completeness of FMIS data.

The HIC has a finance division with qualified and experienced staff. Given this, the division should be involved in the appointment of financial support staff in other divisions and in state offices, at least in an advisory capacity. Financial management training is provided to both financial and operational staff. The ANAO assessed operational staff as generally having the skills required to use financial data, with more senior staff having higher skill levels. The package of systems and tools currently used to assist in assessing financial training needs and providing training is new. The HIC needs to ensure they are fully implemented. The HIC's managers and staff are provided with comprehensive support services to assist in using financial data.

Recommendations

The ANAO made six recommendations to assist the HIC in meeting the objectives set for its financial management systems. The HIC agreed to all recommendations.

HIC's response

HIC commenced a financial management improvement program over two years ago, and further enhancements are planned for 2004.

HIC welcomes the Performance Audit by ANAO of its Financial Management and notes that the audit opinion concludes that HIC has developed a sound financial management framework, and that the framework is consistent with good practice. The framework covers financial processes, procedures and controls, risk management processes, and management reporting. It is integrated with the HIC's governance structure, corporate planning, and performance management.

In order to further strengthen financial management in HIC, ANAO have included six recommendations in their report. HIC agrees with all these recommendations and is committed to implementing them during the course of 2004.

Footnotes

1 Financial statement audit issues are categorised as level A, B or C:

• A - those matters that pose significant business or financial risk to the agency and must be addressed as a matter of urgency;
• B - control weaknesses that pose moderate business or financial risk to the agency or matters referred to management in the past, which have not been addressed satisfactorily; and
• C - matters, which are procedural in nature or minor administrative failings.

2 FINNET is the HIC's financial management information system.