Introduction

The introduction of accrual accounting has required entities to focus on the full costs of their operations. Amongst other things, it has meant that each entity is responsible for capturing, managing and reporting all relevant assets and liabilities, including liabilities relating to employee leave and other entitlements. In aggregate, the liabilities for employee leave and other entitlements for Australian Government entities as at 30 June 2004 was approximately $6 billion. These liabilities relate primarily to entitlements for annual leave and long service leave. In addition to the significant costs involved, the effective management of leave has a direct bearing on the well being and productivity of individual employees. It is therefore important that leave is managed at both a strategic and operational level as an integral part of entities' human resource management strategies.

The industrial relations changes brought about by the introduction of the Workplace Relations Act 1996 (the WR Act), provided, amongst other things, entities with the authority to negotiate with staff or their representatives, a wide range of terms and conditions of employment, including annual leave arrangements. These conditions are reflected in entities' certified agreements and individual Australian Workplace Agreements (AWAs). This has enabled entities to put in place a range of leave arrangements tailored to their particular business and workforce environment and allowed them to more effectively manage the costs associated with leave entitlements. For example, many entities have taken the opportunity to rationalise the number of different categories of leave and to reduce the amount of leave that can be accumulated, and as a result, have reduced administration costs and leave liabilities.

Audit scope and objective

The audit was conducted at the:

• Australian Federal Police (AFP) and the Australian Protective Service (PS);¹
• Australian Sports Commission (ASC);
• Department of Communications, Information Technology and the Arts (DoCITA);
• Department of Family and Community Services (FaCS); and
• Civil Aviation Safety Authority (CASA).

The objectives of the audit were to:

• determine whether entities had established appropriate arrangements in relation to the management of annual leave ²and had effective internal controls over leave processing;
• assess whether leave had been managed in accordance with the requirements of the respective entity's certified agreement; and
• identify sound and better practices in the management and processing of leave.
  

Overall conclusion

Although all entities had in place leave arrangements in their respective certified agreements that, to varying degrees, enable the entities to manage their leave liabilities, five entities were not managing their leave entitlements in accordance with the arrangements outlined in their certified agreement. This situation contributed to annual leave liabilities increasing by approximately 18 per cent over the last three years, and meant that leave liabilities generally were higher than if the leave arrangements had been fully implemented.

The audit found that entities could improve their management of the risks associated with the managing and processing of leave. Not all entities had included these risks in operational risk management or fraud control plans, and those entities that had introduced an Employee Self-Service (ESS) system had not undertaken a risk assessment as part of its implementation.

The audit identified that, generally, entities' practices for the day to day management and processing of leave were adequate. Areas identified where improvements could be made in a number of entities were:

• adopting a proactive approach to managing leave for staff with high leave balances;
• more actively managing the number of unactioned leave applications recorded in their ESS systems;
• better articulating the roles and responsibilities of each of the work areas responsible for leave arrangements; and
• improved reporting and monitoring of leave information to senior management.

The audit found that differing arrangements existed for the recording of attendance by staff and, by extension, the recording of leave taken. In those entities that required attendance to be recorded, this requirement was met by staff up to the APS 6 level, or equivalent, completing flex time records. The audit found that, generally, executive level ³staff did not record details of their attendance. The Australian National Audit Office (ANAO) testing of flex time records generally confirmed that details of leave recorded in these records had been recorded in entities' Human Resource Management Information Systems (HRMIS). Where attendance was not recorded, it was not possible to confirm that all leave taken had been accurately recorded in entities' HRMIS.

Key findings

The audit found that the certified agreements of each of the six entities contained leave arrangements that, to varying degrees, enabled each entity to manage their leave liabilities. Most of these arrangements had evolved over the last six to seven years, being the period that entities have been able to determine, with some exceptions, their own terms and conditions of employment in the context of their individual certified agreements.

The degree of flexibility and management discretion in allowing staff to accumulate annual leave balances varied between entities. The intent of each of the certified agreement arrangements is to require, or at least encourage, staff to utilise their annual leave entitlements, and therefore not to accumulate excessive leave balances, although entities had adopted different arrangements and different approaches to achieving this objective. For example, in one entity, the maximum annual leave entitlement was 30 days but senior management had the discretion to allow staff to accumulate leave beyond this limit to accommodate operational requirements. In another entity the maximum leave balance was 60 days and its HRMIS was configured so that no leave was credited to individual staff members in excess of this limit.

Only one entity had policies and practices in place that ensured full adherence to their certified agreement arrangements. This resulted in approximately five to eighteen per cent of staff in the entities audited with accumulated excess leave balances. It also resulted in a corresponding increase in leave liabilities.

Most entities had not included the risks associated with the management and processing of leave, including for example, the failure to lodge leave applications for all leave taken, into relevant operational risk plans or their fraud control plans. While the majority of the audited entities had in place a risk management framework that included a fraud control plan, the ANAO considers that it is important that risks associated with leave, to the extent they are significant, be included in entities' operational risk management documents and fraud control plans.

The majority of entities had policies and procedures that covered the management and processing of leave. However, the audit identified that not all entities had clearly articulated the roles and responsibilities of the various work areas involved in the management and processing of leave. In some of the entities, responsibility for managing and processing of leave was shared between a number of work areas such as human resources, finance and information technology, and the respective responsibilities of each area were not always clear.

None of the entities that had introduced an ESS system had undertaken a formal risk assessment as an integral part of its implementation. Additionally, not all the risks associated with the implementation of such a system had been identified and controls implemented to effectively manage the risks involved. The audit identified that four of the six entities had introduced an ESS system that, amongst other things, provided the facility for leave to be applied for and approved on-line. Significantly, however, the audit found that the majority of the entities had not been alert to the risk of unactioned leave applications remaining undetected in their ESS. The ANAO identified that in a number of entities there were significant numbers of leave requests within their ESSs that had not been actioned. This situation meant that in many instances leave had been taken that was not electronically approved, and also resulted in leave liabilities being overstated, as leave entitlements had not been reduced at the time leave was taken.

The audit also found that, generally, leave had been approved by appropriate delegates. One entity, however, did not have in place delegations covering long service leave or adoption leave and, as a result, all leave of this type that had been taken over a period of approximately three years, had not been properly approved.

The audit found that differing arrangements existed for the recording of attendance by staff. In those entities that required attendance to be recorded, this requirement was met by staff up to the APS 6 level, or equivalent, completing flex time records. The audit also found that, generally, executive level staff did not record details of their attendance. ANAO testing of flex time records confirmed that, generally, leave taken had been recorded in entities' HRMIS. Where attendance was not recorded, it was not possible to confirm that all leave taken had been accurately recorded in the entities' HRMIS.

Entities' responses

All entities responded positively to the report. The audited entities agreed with the recommendations, or in the case of one recommendation, one entity ‘agreed with qualification' and, in the case of two recommendations, one entity ‘noted' the recommendations.

Specific comments provided by entities in relation to a number of recommendations have been included in the body of the report. No further general comments on the report were provided.

Footnotes

1 The AFP and Australian Protective Service (PS) were amalgamated on 1 July 2004. At the time of audit, the terms and conditions of employees of PS were contained in a separate certified agreement and AFP and PS had separate systems for the recording and processing of leave. Therefore, for the purposes of the audit, the AFP and PS have been identified as separate entities.

2 For the purposes of this audit the ANAO has used the term ‘annual leave'. However entities refer to this entitlement using other terminology such as recreation leave, planned leave or personal leave.

3 This term is used to describe the cohort of employees with the APS designation of Executive Level staff or equivalent.