Introduction

An entitlement to paid annual leave is a statutory minimum condition of employment in Australia. Annual leave provides employees with access to paid days away from their workplace each year. The effective management of annual leave, at both strategic and operational levels, is important in maintaining the well-being of staff, an organisation's productivity and its ability to deliver services efficiently and effectively. In addition, actively managing staff's use of their annual leave entitlements can help reduce the financial risks associated with accruing leave entitlements.

The Australian Government's Consolidated Financial Statements for the Year ended 30 June 2008 reported that there were nearly 290 000 employees working in 187 Australian Government organisations at 30 June 2008. The Australian National Audit Office (ANAO) estimated that the total value of annual leave expenses and accumulated annual leave liabilities for these organisations for the year ended 30 June 2008 was $1.1 billion and $1.8 billion respectively.

The Workplace Relations Act 1996 (WR Act) provided the legislative framework for Australian employers and employees to negotiate terms and conditions of employment. In 2006, the WR Act was amended to, amongst other things, provide five minimum conditions of employment, including an entitlement to paid annual leave. The Fair Work Act 2009 (FW Act), which replaced the WR Act from 1 July 2009, sets out the new legislative framework for workplace relations in Australia. The FW Act also contains a set of minimum conditions of employment, including an entitlement to paid annual leave.

In November 2005, the ANAO tabled Audit Report No.16 2005-06, The Management and Processing of Leave. The audit concluded that the six audited organisations had arrangements that, to varying degrees, enabled them to manage their leave liabilities. However, five of the organisations were not managing leave entitlements in accordance with these arrangements. The audit also considered that organisations could improve the management of the risks associated with managing and processing leave, and that some leave management processes and practices could be improved. These included: adopting a proactive approach to managing staff with high leave balances; more actively managing the number of unapproved leave applications; better articulating leave management roles and responsibilities; and improving the reporting and monitoring of leave information to senior management.

Audit approach

Audit objective and scope

The objective of this audit was to determine whether selected Australian Government organisations had effective processes for managing the annual leave entitlements of their staff, and whether systems and controls over the processing of annual leave were working as intended. In addressing this objective, the audit also assessed progress being made by the audited organisations in implementing the recommendations in ANAO Audit Report No.16 2005-06.

The following organisations were included in the audit:

• Australian Bureau of Statistics (ABS);
• Australian Taxation Office (ATO); and
• Department of Broadband, Communications, and the Digital Economy (DBCDE).

Audit conclusion

Annual leave is a statutory minimum condition of employment that entitles employees to a paid break from their employment each year. The management of annual leave entitlements is important to maintain the well-being of employees, an organisation's productivity and to help minimise associated financial risks.

Overall, the three audited organisations had developed and, for the most part, implemented effective arrangements for managing the annual leave entitlements of their staff. The effectiveness of these arrangements was underlined, amongst other things, by the fact that, for each of the audited organisations, only a relatively small proportion of staff had accumulated annual leave credits above the maximum entitlement.

Each of the audited organisations had developed and implemented a range of controls, and had policy and procedural documentation to support the management and processing of annual leave. In particular, each organisation regularly monitored unapproved leave applications and the level of the annual leave entitlements of staff. They also took action to address excessive annual leave balances.

Although the controls we examined were generally operating as intended, around 20 per cent of the annual leave applications reviewed by the ANAO were recorded in leave processing systems as being approved after the annual leave had commenced. There are valid reasons for annual leave applications not being submitted or approved in the system before annual leave is taken. However, in order to reduce the risks that staff may access leave to which they are not entitled, organisations need to routinely monitor the timely approval of leave applications in their leave processing systems.

The ATO and DBCDE had fully implemented the six recommendations contained in Audit Report No.16 2005-06 that were relevant to them. The ABS had fully implemented two, and partially implemented three, of the five recommendations from that audit that were relevant to the organisation.

This audit makes one new recommendation designed to improve the timeliness of the approval of leave applications in organisations' leave processing systems, including reducing the extent to which applications for annual leave are being approved after the commencement of leave.

Key findings by chapter

Chapter 2 - The management of annual leave

For the most part, the three audited organisations had developed and implemented effective arrangements for managing the annual leave entitlements of their staff. The effectiveness of these arrangements was demonstrated by the fact that in each organisation:

• only a relatively small proportion of staff had accumulated annual leave credits above the respective maximum entitlement;
• over the three year period to 30 June 2008 the movements in annual leave liabilities could be largely attributed to changes in each of the organisation's staff numbers and pay increases rather than to increases in accumulated leave entitlements; and
• over the three year period to 30 June 2008 the average number of days of annual leave utilised per full-time equivalent staff member had increased.

Each of the audited organisations had developed policies and guidelines to support the management of annual leave and also had mechanisms to support managers with leave related responsibilities. Leave-related guidance was readily available on each organisation's intranet, and Human Resources staff in each of the organisations regularly provided advice or information on leave management issues.

The ATO and DBCDE had sound processes in place for assessing and documenting risks associated with the management and processing of annual leave. The ANAO agreed with the ABS' assessment that it did not consider there were any significant enough risks related to the management or processing of annual leave to justify inclusion in its 2008-09 enterprise risk management plan.

The ABS did not previously require a formal assessment of risks to be undertaken as part of business planning processes at operational levels, including an assessment specifically covering human resource-related activities. The ABS advised that each business area is now required to undertake and document a risk assessment in the development of its business plans. The ABS also advised that only allowing staff to accumulate a maximum of 40 days annual leave, together with its current annual process of deeming those staff carrying over 40 days to be on leave, lowers its risks.

Chapter 3 - The processing of annual leave

Each of the audited organisations had implemented systems enabling the on-line processing of annual leave applications. Despite the use of these systems, each organisation also manually processed, or had to manually adjust, a number of leave applications each month. Manual processing potentially increases the costs of administration and needs to be carefully managed.

Each of the audited organisations had developed a range of controls over the processing of annual leave applications, including the monitoring and follow-up of leave applications that had been submitted, but not approved. The ANAO's testing indicated that these controls were generally operating as intended. The main shortcomings identified were:

• around 20 per cent of the annual leave applications examined in each of the audited organisations were recorded as approved after employees had commenced annual leave; and
• there were several discrepancies between the annual leave details on selected attendance records and leave data recorded in the Human Resource Management Information Systems at DBCDE and the ABS.

Chapter 4 – Monitoring and reporting of annual leave

Each of the audited organisations had processes for identifying and monitoring staff that had accrued excess annual leave balances. The ATO and DBCDE also monitored annual leave balances prior to the maximum level of annual leave entitlements being reached.

Line managers at each organisation had access, principally through the organisation's personnel system, to a range of information to assist in the management of annual leave entitlements. Line managers were also able to view on-line the annual leave balances of their staff.

The ATO and DBCDE regularly provided senior management with reports containing annual leave-related information. In addition, the ATO provided its Executive with an annual Certificate of Assurance, reporting conformance with its leave obligations and, in particular, the management of leave entitlements.

Summary of organisations' responses to the audit report

The ATO, DBCDE and the Australian Public Service Commission, agreed with the recommendation in this report. The ABS agreed with qualification. The ABS agreed that timely approval of leave applications and monitoring compliance was desirable, but advised that its HRMIS does not currently have this capability. The organisations' responses to the recommendation are shown in Chapter 3. Other comments provided are shown in Appendix 1.