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“AUDITING IN THE PUBLIC INTEREST” NEWSLETTER, WINTER 2003 New focus for our newsletter These quarterly Auditing in the Public Interest newsletters have, in the past, drawn attention to the work of the Office and any significant change to its operating arrangements. We have challenged whether that goes far enough. We have decided to broaden the content so that it contains information about current work in progress (performance audits or special inquiries), and material that will be of reference value to the reader. The Autumn 2003 newsletter, for example, contained a substantive feature about Auditor independence – developed in response to reforms currently under consideration around the globe following a number of spectacular corporate collapses and a questioning, among other things, about the independence of auditors. This newsletter contains comment on the major transformation of accounting standards over the next 12 months following the replacement of domestic Australian Accounting Standards with international ones, and foreshadows the risks to the public sector of not readying itself in time. It also includes an IT project checklist. The checklist is, of necessity, pitched at a high level – for CEOs and members of governing bodies - to help them ask the core questions whenever IT projects (or any project for that matter) are underway in their organisation. Getting satisfactory answers to these questions should, I hope, minimise the risk of the Auditor-General having to report adversely on your project! I hope you find the new focus of our newsletter and its more substantive content useful. Wayne Cameron
Auditor-General’s reports Recently tabled reports Electronic procurement in the Victorian government Theme: Governance and public sector management The audit examined the Electronic Commerce for Procurement Project and assessed whether government agencies had efficiently and effectively planned and introduced electronic procurement. It looked at how a central project team in the Department of Treasury and Finance developed and managed its e-procurement project at the whole-of-government level. It also examined e-procurement implementation and sustainability in the Department of Education and Training, the former Department of Natural Resources (comprising the Department of Primary Industries and Department of Sustainability and Environment) and Victoria Police. The Victorian Government took a visionary path in introducing e-procurement and, through its agencies, has streamlined internal processes and improved workflow solutions. However, early public statements of the benefits of e-procurement relied on inadequate business cases and were overly optimistic. Progress is substantially behind schedule. Government-wide problems - including tensions around procurement and rural and regional development policy and best practice advice, and the long-term future of the external catalogue - remain. Report of the Auditor-General on RMIT’s finances Theme: Governance and public sector management The report identified significant and unsustainable deterioration in RMIT’s University’s financial performance from 2000 to 2002. This meant that the University urgently had to improve its financial management. Since 1999, there was a 22.5 per cent growth in revenue, yet expenditure increased by 42 per cent. The mismanagement in setting up the Academic Management System contributed to RMIT’s weakened financial position. However, other factors also contributed, such as high overhead costs, losses from research activities, low TAFE productivity and high costs from a large property portfolio. We found that although RMIT had started to address its financial position, senior management must develop a comprehensive plan outlining the weaknesses and issues adversely affecting the University’s financial performance, and must establish achievable timelines for specific corrective action. The University Council must closely monitor this process. Report on Public Sector Agencies: Results of special reviews and financial statement audits for agencies with balance dates other than 30 June 2002 Theme: Serving the wellbeing of the community This third and final report in our public sector agencies series had 3 segments: • the results of financial statement audits on public sector agencies with balance dates other than 30 June 2002; • our findings from 4 special reviews addressing: • maintenance of school facilities; • student administration systems in universities and TAFE institutes; • overseas operations of Victorian TAFE institutes; and • management of the Master Agency Media Service Contracts for government advertising; and • the action agencies had taken on the recommendations in our 2000-01 performance audit reports. We issued 132 audit opinions on the financial statements of agencies with balance dates other than 30 June 2002. Seven of these were qualified opinions because of deficient accounting records and systems, inappropriate reckoning of Commonwealth Government general operating grants, and the method of valuing non-current assets. Agencies can be more timely in completing audited financial statements. Only 34 per cent of entities with balance dates other than 30 June met the 12-week legislative time frame. Most public sector agencies had effective internal controls over the financial and information technology systems used in preparing their annual financial reports, but they could manage the process better, including: • audit committee arrangements; • risk management arrangements; • asset and debt management practices; and • information technology management. The Executive Summary of the report outlines the principal findings from the 4 special reviews. We followed-up 7 performance audits (see below) conducted during 2000-01, and reported the results in the June 2003 Report on Public Sector Agencies.
We assessed the action agencies took in response to the recommendations of our performance audit reports tabled in 2000-01. This enhancement to the performance audit process will be continued in 2003-04. Upcoming audit reports Section 7A of the Audit Act 1994 requires the Auditor-General to prepare an Annual Plan and present it to Parliament, following consultation with the Public Accounts and Estimates Committee. Our Annual Plan for 2003-04 was presented to Parliament on 27 June 2003. It contains information on: • our current strategic directions; • the steps we follow in strategic audit planning; • those areas of major audit interest identified as potential future performance audits; and • the organisational improvement initiatives that we have earmarked for attention over the period. The Plan is available on our website at www.audit.vic.gov.au  Reports scheduled to be tabled in the Spring 2003 session The following reports are scheduled to be tabled in the Spring 2003 session of Parliament: • Improving literacy standards in government schools; • Establishing sustainable forests; • Assessing the needs of Victorian prisoners; • Budget development and management within departments; • Report on the Finances of the State of Victoria, 2002-03; and • Report on Public Sector Agencies – Results of financial statement audits with 30 June 2003 balance dates. Accounting Standards update Adoption of international financial reporting standards in Australia by 2005 In July 2002, the Financial Reporting Council, which is responsible for the broad oversight of the accounting standard-setting process in Australia, announced that the Australian Accounting Standards Board (AASB) would work towards adoption of international accounting standards for reporting periods commencing on or after by 1 January 2005. The decision was in response to increased demand for high quality, internationally comparable financial reports. While the AASB will continue to issue Australian standards, the AASB’s approach will be to formulate Australian equivalents of international standards by adopting the content and wording of the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Changes in wording will be limited to accommodating the Australian legislative environment and any broader requirements for the public sector and the not-for-profit sector, which is currently not covered by the scope of the IASB standards. The decision will mean that Australian entities applying AASB standards will comply with the IASB standards. The AASB will retain or develop additional standards when required to cater for purely domestic issues. The sleeping giant In a recent media release, the Chairman of the AASB noted that the move to adopt international accounting standards “represents the biggest change to accounting in Australia for decades”. While Australia has been harmonising its accounting standards with the international standards since 1996, the adoption of the IFRS will significantly impact the financial reporting landscape in Australia because: • Differences remain between the harmonised Australian standards and the international standards; • The current Australian standards do not address a number of issues including recognition and measurement of financial instruments, intangible assets, investment property, accounting for post-employment benefits and obligations associated with the retirement or disposal of long-lived assets; and • There will be changes to the international standards before 2005. At 1 January 2003, there were 33 international standards of which it is likely that only 3 will remain unamended by 2005. For example, changes to IFRS are expected in relation to share-based payments, business combinations, performance reporting, insurance contracts, financial institutions and as a result of the joint project with the US Financial Accounting Standards Board, which is aimed at achieving convergence for a number of standards. What are the key impacts? Application IFRS will apply to all reporting entities, including the public sector and not-for-profits. The ambit of the IFRS is wide and some non-reporting entities, including non-reporting corporate entities, will need to apply the recognition and measurement criteria of the IFRS. Timelines for compliance All reporting entities must prepare their financial reports for reporting periods beginning on or after 1 January 2005, including prior year comparatives, in accordance with IFRS. This means that IFRS must be reflected in financial reports for periods: • ending on 31 December 2005 with comparatives for 31 December 2004; or • ending on 30 June 2006 with comparatives for 30 June 2005. Comparative amounts in the first IFRS compliant financial report are required to be restated as if the IFRS had always applied, subject to certain exemptions. As transactions and balances are required to be restated, entities will need to calculate an IFRS compliant opening balance sheet as at 1 January 2004 or 1 July 2004, as applicable. Where there are adjustments to amounts previously reported using Australian generally accepted accounting principles, these adjustments must be recognised directly in equity. Major reporting changes While many issues in the proposed IFRS remain subject to deliberation, it is apparent that some significant changes in current financial reporting may result, particularly where there is a gap in the existing suite of accounting standards. In general, there is an emphasis on fair value, however, the effect of adoption for each entity will vary according to its circumstances. Major likely impacts include: • Financial instruments - At present, some financial assets and liabilities are not recognised on the statement of financial position due to the lack of an Australian standard. The new rules regarding the recognition and measurement of financial instruments will result in the recognition on balance sheet of all financial assets and liabilities, including derivatives, and will require measurement of most financial assets at fair value. Gains and losses on many financial assets will need to be recognised in the statement of financial performance. Financial assets held at cost will be subject to an impairment test; • Intangibles - Due to the absence of an Australian standard, various recognition and measurement practices have been adopted in relation to intangibles. The new requirements will establish recognition criteria for intangibles and require derecognition of certain intangibles. Capitalisation of research costs will be prohibited and capitalisation of development costs is subject to certain conditions; • Impairment of assets – The current recoverable amount test will be replaced with a more rigorous and prescriptive test. Where asset values are calculated using the net present value of future cash flows, these cash flows must be discounted, which may lead to more write-downs; • Employee benefits – The existing employee benefits standard, AASB 1028, excludes post-retirement benefits. Entities will be required to recognise as an asset or liability any deficit or excess in a defined benefit scheme and reflect any associated actuarial gains or losses in the statement of financial performance; • Asset revaluations – Revaluation increments and decrements must be accounted for on an individual asset basis; and • Residual values – The residual value of an asset will need to be reviewed at each reporting date. Central agencies response The adoption of IFRS in public sector reporting has wide-ranging implications for public sector entities. Accordingly, the Department of Treasury and Finance advised in January 2003 that it would be developing a communication and implementation strategy for the adoption of IFRS across Victorian departments and agencies. Currently, the Department, as part of a working party with other Australian jurisdictions, reviews and provides comment to the AASB regarding exposure drafts of proposed IFRS. Similarly, this Office, through the Australasian Council of Auditors-General, has put forward its views in regard to the proposed standards. What should individual agencies be doing now? Surveys within the profession have consistently indicated that, while there was a level of awareness of the new standards, there was a lack of detailed understanding of the implications of the change and what entities needed to do to comply. Boards and senior managers should be already considering: • The likely effects on the budgeting process, workload, report presentation and relationships with financiers, financial advisers, IT suppliers and other stakeholders. The change is not purely a financial reporting exercise and could impact a range of people outside the finance function; • A gap analysis to identify information that is available now and information required under IFRS; • Where there is a gap, changes to systems and processes to ensure the required information is collected and internal reporting is aligned with the new requirements; • A training strategy to ensure a sound understanding of the new requirements underpins the change to IFRS; and • How the Board, audit committees and other governance committees are kept abreast of developments. Australian Accounting Standards Board – Recent releases As part of its 2005 adoption program, the AASB has just released the following: • ED 118, Request for Comment on IAS 11 Construction Contracts, with a comment period ending on 30 September 2003; • ED 119, Request for Comment on IAS 14 Segment Reporting, with a comment period ending on 30 September 2003; and • ED 120, Request for Comment on IAS 16 and IPSAS 17 Property, Plant and Equipment, with a comment period ending on 30 September 2003. The AASB has also released ED 117, Request for Comment on IASB ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations, for public comment. The current Australian requirements are contained in AASB 1042, Discontinuing Operations. The ED introduces specific rules on the measurement of non-current assets held for sale. The proposals in ED 117 will also affect the presentation of discontinued operations and a deferral of the time when discontinued operations are recognised. The AASB is seeking comment on ED 117 by 30 September 2003, and the IASB on ED 4 by 24 October 2003. UIG – Urgent Issues Group Review of UIG Abstracts for 2005 UIG Abstracts 1 to 12 have been reviewed in conjunction with the AASB’s program to adopt international accounting standards by 2005. The following Abstracts are due to be formally withdrawn, as they have been either superseded by Australian standards, or are no longer applicable: • Abstract 2, Accounting for Non-vesting Sick Leave; • Abstract 6, Accounting for Acquisitions – Deferred Settlement of Cash Consideration; • Abstract 8, Accounting for Acquisitions – Recognition of Restructuring Costs as Liabilities; and • Abstract 12, Accounting for the Costs of Modifying Computer Software for the Year 2000. Abstracts 13 onwards will be considered at the next UIG meeting. UIG releases Superannuation Disclosures by Employees The UIG has encouraged the AASB to issue the Australian equivalent of IAS 19 as soon as possible. IAS 19, Employee Benefits, requires defined benefit obligations and the fair value of plan assets to be determined with sufficient regularity so that the amounts do not differ materially from the amounts that would be determined at the reporting date. This would result in more timely information on accrued benefits and plan assets, and facilitate more effective disclosure than is required under AASB 1028. Leases – Determining whether an Agreement contains a Lease The UIG discussed a draft Interpretation developed by the Financial Reporting Interpretations Committee on whether a purchaser controls the right to use an asset when the purchaser has the right to acquire substantially all of the output produced by the asset. Up-to-date information on the activities of the AASB and the UIG are available on www.aasb.com.au Accounting information Implementation of new Ministerial Directions and a Financial Management Compliance Framework The Minister for Finance in early July 2003 launched a revised package of Ministerial Directions under the authority of the Financial Management Act 1994 and the introduction of a new Financial Management Compliance Framework. The revised Ministerial Directions are operative from 1 July 2003 and include changes in the financial management obligations of public sector agencies, including the introduction of strengthened requirements in the area of financial management governance and oversight. All Victorian public sector agencies subject to the Financial Management Act 1994 are required to comply with all new Ministerial Directions as from 1 July 2003, except for the Directions included in Part 2 (Financial Management Governance and Oversight) - for which an exemption from full compliance is provided until 1 January 2004. This exemption only applies if agencies are “in good faith complying with each of those Directions to the greatest extent reasonably possible”, recognising that full implementation of the new requirements may not be possible immediately but can be achieved within a 6-month period. A significant element of the reforms is the introduction of a complementary Financial Management Compliance Framework, which will provide a mechanism to monitor and review compliance with the legislative and regulatory financial management. The compliance framework introduces a 3-tier reporting regime under which: • At an entity level - Individual public sector agencies provide annually certifications to the portfolio Ministers (via departments), based on a checklist, as to their compliance with the established financial management requirements; • At a portfolio level - Departments have a portfolio compliance monitoring role for entity-specific issues, with entity certifications to be consolidated into a single annual portfolio report to be provided to the relevant portfolio Minister and the Minister for Finance via the Department of Treasury and Finance; and • At the whole-of-government level - The Department of Treasury and Finance assists the Minister for Finance in the consolidation of portfolio compliance reports and monitoring financial management compliance across the public sector, including the identification of systemic issues and their resolution. The principal responsibility for compliance rests with individual agencies. However, to ensure that financial management compliance is effective and transparent in public sector governance arrangements, the framework establishes explicit reporting responsibilities/obligations on agencies and portfolio ministers/departments. The compliance reporting regime commences in 2004-05 and is mandatory for all entities forming part of the economic entity of the State of Victoria, as identified in the Government’s Annual Financial Report. Accordingly, it does not include local government entities, universities and denominational hospitals. Given the above major changes to the financial management obligations, it will be critical that all agencies develop a clear understanding of the changes and their implications at the earliest possible opportunity to ensure that the necessary strategies are established to ensure agency compliance with the new requirements. Accounting guidance The Department of Treasury and Finance website (www.dtf.vic.gov.au) provides extensive information on accounting and financial reporting activities, including Financial Reporting updates. The latest update was issued in January 2003. Accounting Financial Reporting Bulletin 43, Accounting for Water as Inventory, was issued in April 2003. Better practice OECD commentary on IT projects The implementation of a new IT system, or the replacement of an existing one, is a major initiative for most organisations. It is likely to be resource intensive, both in respect of internal and external costs, and time critical. Effective project management is essential to the successful completion of the project. The Organisation for Economic Cooperation and Development (OECD) management brief The Hidden Threat to E-Government: Avoiding large government IT failures, OECD Public Management Policy Brief No. 8, March 2001 addresses the problems in implementing large IT projects in both the public and private sectors. It reports that “… budgets are exceeded, deadlines are over-run and often the quality of the new system is far below the standard agreed when the project was undertaken”. As few as 28 per cent of IT projects undertaken in the United States in 2000 were successful in relation to budget, functionality and timeliness, and an equivalent number were cancelled. The OECD recognises that problems with IT projects represent significant economic, political, efficiency and effectiveness risks to government, but of more concern is that IT projects that fail to achieve their objectives place e-government initiatives at risk. It concludes that public sector organisations should identify risks, determine which they are willing to take, and manage them within appropriate governance structures. The themes in the policy brief are based on the experiences from participants and country reports presented at a meeting on 26-27 October 2000. Representatives of 17 countries met at OECD headquarters in Paris to share experiences on managing large public IT projects. The meeting helped to define the problems and find possible solutions. Their key themes are reproduced below: Establish appropriate governance structures Rapid policy change, higher standards of accountability and short deadlines are commonplace in the public sector. These risks to the IT implementation project should be identified and managed. Think small Undertake projects that can be reasonably completed over 6 months, offer technical simplicity and have modest ambitions for business change.  Identify and manage risks For risk identification programs to be effective, management needs to address problems immediately and thoroughly. Use known technologies Use known technologies rather than new technologies, and minimise customisation of standard software. If new technologies are unavoidable, a rigorous testing program should be undertaken prior to establishing an implementation contract. Hold business managers accountable IT system implementations must be led by senior management and not IT experts. Senior management leadership, responsibility and accountability are critical to the success of an IT project. In planning the project it is necessary to identify who will be held accountable for delivery, and when performance will be measured. Ensure compliance with best practice for project management • Recruit and retain talent - Frequently, the public sector has a lack of relevant IT skills, creating a high level of reliance on contractors; • Prudently manage knowledge - Knowledge management initiatives include training staff, arranging seminars, and collecting and managing IT-related information in databases; • Establish an environment of trust with private vendors - This could involve offering rewards for good performance such as bonuses rather than just focusing on penalties for poor performance. It also involves partnering and sharing an agency’s vision and objectives in relation to the project with vendors so that they have a better understanding of the business requirements; and • Involve end-users. Further information on the OECD commentary is available on our website www.audit.vic.gov.au/reports_better_practice/agbp02.html Other better practice information is also available on Commonwealth and State Audit Office websites. Links to these sites are available on www.audit.vic.gov.au/links.html Office news Enhancements to audit legislation During June 2003, Parliament passed a wide range of amendments to the Audit Act 1994. These amendments significantly strengthen the legislative framework of the Auditor-General. The Auditor-General can now present audit reports to the Clerk of each House of Parliament, making these public documents, while Parliament is in recess. This allows greater flexibility to the Auditor-General, and helps avoid delays in public disclosure of matters in audit reports. The Auditor-General’s mandate now encompasses all entities that the State controls (e.g. 50 per cent or more shareholding or ownership). Previously, the State had to fully-own companies and other bodies before the Auditor-General could examine them. Under transitional provisions (section 28), the amendment will not take effect for an entity falling within the widened definition until the end of the term of appointment of the entity’s existing auditor. We would appreciate early advice from agencies if they become aware of any entities that fall within the amended definition of an authority in the legislation. The statutory threshold covering those audits where the Auditor-General may delegate signing power to an audit service provider has been increased from net assets of $1 million to expenditure of $5 million. The delegation action must only apply to the expression of an audit opinion on financial statements. It cannot be applied to any communications to Ministers relating to the audit opinion. Audit service providers must be a registered company auditor to receive a signing delegation. Delegations would not automatically occur for all audits falling under the new threshold as risk and other factors would be taken into account before final decisions were reached. We will promptly inform relevant agencies whenever, in respect of their audit, a signing delegation has been given to the audit service provider appointed by my Office. The amendments empower the Auditor-General to examine instances of waste, probity or lack of financial prudence in the use of public resources. The legislation also identifies the importance that Parliament places on the use of this power. The legislation indemnifies the Auditor-General and staff from personal liability for acts or omissions carried out in good faith in the performance of official duties. It authorises the Auditor-General to inform designated public officials such as the Police Commissioner, the Ombudsman and the responsible Minister whenever deemed desirable during the course of an audit (e.g. in cases of suspected fraud). The Auditor-General may now audit the financial statements of a non-public body, if invited, and the Auditor-General considers it is in the public interest and practicable to do so. Lastly, the Auditor-General must now detail in the Annual Report the quality assurances practices that the organisation applies. This amendment reinforces our obligation to ensure that we fully inform Parliament of the soundness of our practices in this key area of corporate governance. In March 2003, Parliament also amended the Constitution Act 1975 so that only a referendum can change the provisions for the Auditor-General’s appointment, tenure and independence. With these important changes to the audit legislation, together with the amendment to the Constitution Act, Victoria leads the way in terms of an Auditor-General’s legislative framework. Liaison protocols with the Public Accounts and Estimates Committee The Committee and our Office have developed a statement of protocols covering the various forms of dialogue and consultation likely to occur over the course of a year. Gold Award for 2001-02 Annual Report Our 2001-02 Annual Report won a Gold Award for the second consecutive year in the Australasian Reporting Awards (ARA) in May 2003. The Awards, hosted by Australasian Reporting Awards Australia, recognise best practice in annual reporting. They attract entries from listed companies, government agencies, community groups and not-for-profit organisations. This Award represents the highest standard of excellence in reporting. ARA commended our 2001-02 Annual Report for its strong alignment with ARA criteria, and for conveying transparency and accountability in an easy-to-read manner. Senior staff changes The following senior staff changes have occurred: • Pam Williams, General Manager, Performance Audit, has taken up the position of Director of Social Policy in the Victorian Department of Premier and Cabinet. Rob Fearnside is currently Acting General Manager, Performance Audit; and • Jim Dixon, former Director, Accounting and Audit with CPA Australia, has taken up the position of Assistant Auditor-General, Accounting and Auditing Policy.
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