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“AUDITING IN THE PUBLIC INTEREST”
NEWSLETTER, SUMMER 2003
Adding value and enhancing accountability
I signalled in our Winter newsletter that future issues would include more in-depth articles. Feedback from readers has been positive to this change. Part of this step towards providing more value add includes the development of stand-alone publications. We are about to release Chief Finance Officer: Roles and responsibilities good practice guide. This publication supports the Financial Management Compliance Framework developed by the Department of Treasury and Finance. This should assist CFOs, CEOs and audit committees, and will help organisations maintain an effective CFO function.
In the meantime, we hope you enjoy this newsletter. We have included an article on the impact of International Financial Reporting Standards (IFRS) and the public sector, and an analysis of CLERP 9 as it relates to public sector agencies. Our Better practice section features internal budgeting guidance. We have also tabled several reports in Parliament recently. These covered topics such as literacy standards in government schools, Parliament’s IT upgrade, forest licence buy-back scheme, meeting the needs of Victorian prisoners, and a report on the finances of the State. An overview of these reports is included in this newsletter.
We also include a summary of our November 2003 Report on Public Sector Agencies. This report has been restructured. It now includes 2 main parts: a summary of key themes and cross-sector issues, and a sector-based analysis of the results of financial statement audits and any special reviews. Recommendations made in the report aim to improve financial management and accountability in the Victorian public sector.
Don’t forget that all of our publications, including parliamentary reports and this newsletter, are available on our website at www.audit.vic.gov.au We recently enhanced our website with interactive summaries of our parliamentary reports. If you have feedback on these, or other aspects of our website, please contact us.
This is our last newsletter for the year, so I would like to wish all readers a safe and happy festive season. Our next newsletter will be published in March 2004. I hope you continue to find this material informative and interesting.
Wayne Cameron
Auditor-General
PURPOSE OF OUR NEWSLETTER
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Auditing in the Public Interest is published to provide information to public sector agencies on recent results of completed audits, and current developments in financial disclosure and reporting. Information on audits currently underway and scheduled for completion in Autumn 2004 is also provided.
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Contents
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Recent reports 2
• Report of the Auditor-General on the Finances of the State of Victoria, 2002-03 2
• Report on Public Sector Agencies: Results of special reviews and 30 June 2003 financial statement audits 2
• Improving literacy standards in government schools 3
• Managing logging in State forests 3
• Parliament’s information technology upgrade 4
• Addressing the needs of Victorian prisoners 4
• Annual report, 2002-03 4
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Upcoming reports 5
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International Financial Reporting Standards (IFRS) and the public sector 5
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General accounting issues 7
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Better practice in internal budgeting 7
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Senior staff movements 8
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Recent reports
Report of the Auditor-General on the Finances of the State of Victoria, 2002-03
The Report of the Auditor-General on the Finances of the State of Victoria, 2002-03 was tabled in Parliament on 20 November 2003. It analyses the state’s financial performance and position for the 2002-03 financial year.
The state’s financial condition remains sound, however, annual operating surpluses continue to decline, despite strong economic activity in Victoria.
While state revenue grew by 21 per cent during the 5-year period 1999 to 2003, expenditure increased by 35 per cent. In the last financial year, expenditure increased both in nominal terms, and marginally faster than the Victorian economy’s growth. Any unanticipated downturn in the economic cycle, and further expenditures, such as wage growth, will place pressure on the state’s finances.
The state is vulnerable to movements in financial markets. This is highlighted by variation in investment returns and superannuation costs. The strong property market has contributed positively to the state’s operating result. However, the unpredictability of this market is a risk to future state revenue levels.
The trends in the state’s finances show a need for continued vigilance by the government. This will ensure longer-term sustainability of public sector activity and program levels. The ongoing challenge for the government is to regularly review key risks to the state’s finances. These risks should be factored into financial planning and management.
Report on Public Sector Agencies: Results of special reviews and 30 June 2003 financial statement audits
The Auditor-General’s Report on Public Sector Agencies was tabled in Parliament on 26 November 2003. It outlined:
• the results of financial statement audits for agencies with 30 June 2003 balance dates;
• findings from special reviews on waste management by the Central Gippsland Region Water Authority, and catchment management in Victoria; and
• the action taken by agencies on the recommendations in 2 previous performance audit reports.
Results of financial statement audits
We issued 453 audit opinions on the financial statements of state and local government agencies with 30 June 2003 balance dates. Thirteen of these opinions were qualified because of inappropriate disclosure of grants, failure to consolidate controlled entities and our inability to audit comparative balances on 3 companies acquired during the year by the state. We issued 79 audit opinions on performance statements of local government, including 4 qualified opinions.
There was a substantial improvement in the timeliness of financial statement completion with 66 per cent of state agencies (40 per cent in 2002) and 95 per cent of local government agencies (76 per cent in 2002) meeting their statutory reporting deadlines. We recommended further improvements in the timeliness of financial reporting.
Most public sector agencies had effective systems of internal control. However, in certain agencies, improvements can be made to the development of risk management frameworks, control over information technology, and processes within key accounting systems.
The financial position of the hospital sector deteriorated further in 2002-03. We recommended that the Department of Human Services take action to address financial difficulties facing certain hospitals.
Waste and catchment management
We reviewed the waste management operation of the Central Gippsland Region Water Authority. We recommended a number of improvements to the planning and management of these operations.
Landfill trench under construction being lined with geomembrane
at the Dutson Downs waste management site.
We also identified areas where financial management and governance processes in certain catchment management authorities could be improved. We recommended that an integrated catchment management strategy be developed for the state.
Action on previous performance audit reports
In 2002-03, we began follow-up audits of action taken on recommendations contained in performance audit reports. We do this 2 years after the reports are tabled. Follow-up audits provide an update on progress to the public and assists the Public Accounts and Estimates Committee in any follow-up reviews it schedules on performance audits.
We commented in this report on follow-ups of 2 performance audit reports tabled in Spring 2001: Teacher work force planning and Management of major injury claims by the Transport Accident Commission. We found that:
• The Department of Education and Training has begun implementation of recommendations made in our report on teacher work force planning. The department needs to take further action in a number of areas; and
• The Transport Accident Commission had implemented a range of strategies to deliver better outcomes for patients.
Improving literacy standards in government schools
Maintaining high standards of literacy is a major responsibility for Victorian schools. Between 1996 and 2003, the Department of Education and Training invested $662 million in various literacy improvement programs. We examined the efficiency and effectiveness of 3 key literacy improvement programs (Early Years, Reading Recovery and Restart) in Victorian government schools. We examined whether:
• students who participated in these programs improved their literacy proficiency, and whether this improvement was sustained over time;
• the current methods of resource allocation for literacy improvement programs are appropriate; and
• the literacy proficiency data collected in schools is complete, accurate and used appropriately for decision-making and reporting.
Using the results of the statewide testing program for reading proficiency, we found little average improvement in the reading proficiency of all students at Years 3, 5 and 7 over a 7-year period to 2002. Our analysis of student assessment data from the 3 literacy improvement programs showed that participating students had improved their reading proficiency while in the programs, however, we concluded that the department could not determine how much of this improvement was a direct result of program participation.
We observed that the current method of allocating funds to schools for 2 of the 3 programs does not take into account relative student need based on performance. We found that the completeness and accuracy of student assessment data collected in schools is adequate. However, these data are not being used as effectively as possible for continuous improvement purposes.
The Auditor-General’s report Improving literacy standards in government schools was tabled in Parliament on 15 October 2003.
We made 28 recommendations. These include more rigorous program evaluation methodologies; better management, monitoring and use of student assessment data; and more targeted allocation of resources for literacy improvement programs.
Managing logging in State forests
The Auditor-General’s report Managing logging in State forests examined the implementation of sustainable commercial logging in state forests and was tabled in Parliament on 28 October 2003. Following a review of timber resources in 2001, the government identified that if logging in state forests is to be sustainable, current harvesting rates must be reduced by about one-third on a statewide basis, and by up to 80 per cent in some individual forest areas. The government committed to buying back sufficient licensed sawlog volumes to achieve these reductions in logging, through the Voluntary Licence Reduction Program.
One of the consequences of reducing logging levels is reduced employment in the forest industry. The government, therefore, also committed to cushioning the consequences of the licence buy-back on individual workers, and their wider communities, through Worker and Contractor Assistance Programs.
We examined the Voluntary Licence Reduction Program, the Worker Assistance Program and the Contractor Assistance Program.
We found that the Department of Sustainability and Environment (DSE) has established the foundations for the sustainable management of state forests by reducing licensed sawlog volumes in these forests to the target levels through licence buy-back.
At 30 June 2003, of the 348 displaced workers whom the Department of Victorian Communities assessed as eligible for the Worker Assistance Program, 220 had secured another job, 73 were in training, 13 were unemployed and 21 had retired voluntarily. At 30 September 2003, while an additional 74 workers had secured another job, the number of workers unemployed had also increased.
When applications closed on 29 November 2002, the Rural Finance Corporation had received 175 applications for the Contractor Assistance Program. At 30 September 2003, 37 applicants had received, or been assessed as eligible to receive, assistance through the program. One hundred and nineteen applications were on hold. DSE’s delay in implementing the Contractor Assistance Program has created uncertainty for these harvest and haulage contractors.
Parliament’s information technology upgrade
We examined Parliament’s information technology upgrade (the Parlynet 2002 Project) following a request from the Speaker of the Legislative Assembly in March 2003.
There were performance problems with the upgraded system, and users who responded to an audit survey were clearly unhappy about the speed, reliability and functionality of the system. Many aspects of project governance and project management were not addressed during the project. Some key risks to Parliament were also not adequately managed. We believe that the unsatisfactory outcomes of the project were a by-product of wider issues related to the management of Parliament’s administrative services.
The Auditor-General’s report on Parliament’s information technology upgrade was tabled in Parliament on 16 September 2003. It was well received by Members of Parliament and the Joint Services Department.
Addressing the needs of Victorian prisoners
Over the past decade, there has been significant growth in prisoner numbers in Victoria. Sixty-one per cent of current prisoners have been in prison before.
In 2001, the Department of Justice developed the Reducing Re-offending Framework to reduce prisoner re-offending and associated growth in prisoner numbers. The initiative targets prisoners with a high risk of re-offending for participation in appropriate rehabilitation programs.
Correctional staff consider that prisoner assessments provided valuable information to assist staff in engaging prisoners and encouraging their participation in rehabilitation programs.
Our audit focused on the progress of Corrections Victoria’s (a business unit of the Department of Justice) implementation of the initiative. We examined the:
• development and implementation of prisoner assessment tools;
• appropriateness of assessment staff training;
• extent to which assessment information informed prisoner management; and
• prisoner access to programs identified in assessments.
While the initiative is in the early stages of implementation, we found the following issues need attention for enhanced prisoner management. Corrections Victoria needs to:
• establish suitable project management and governance arrangements supporting prisoner assessment tool development;
• ensure all eligible prisoners are assessed for risk and needs;
• closely monitor the re-offending rate by prisoners who do not receive a risk and needs assessment so that this group does not increase Victoria’s overall rate of prisoner re-offending;
• develop a strategic approach to managing cultural change associated with the reform;
• formalise and improve communications with correctional staff and stakeholders about the directions being taken; and
• progress, as a priority, the use of prisoner assessment information to manage prisoners, and ensure prisoner access to appropriate programs and services to address both their risk of re-offending and identified needs.
The Auditor-General’s report Addressing the needs of Victorian prisoners was tabled in Parliament on 19 November 2003.
Annual Report, 2002-03
My annual report for 2002-03 was tabled in Parliament on 16 September 2003.
It reports our performance for the year. Some of the highlights reported were:
• enhancements to audit legislation;
• progress in implementing recommendations arising from the 2001 independent performance audit of our office;
• increased number of reports tabled in Parliament;
• introduction of liaison protocols with the Public Accounts and Estimates Committee;
• further strengthening of our financial statement audit services through internal organisational reform;
• steps taken to maintain audit quality through a range of quality assurance processes; and
• business improvement initiatives.
Upcoming reports
Reports scheduled to be tabled in the Autumn 2004 session
Our 2003-04 Annual Plan for was tabled in Parliament on 27 June 2003. It contains information on our current strategic directions, the steps we follow in strategic audit planning, areas of major audit interest identified for future performance audits and organisational improvement initiatives. The plan also includes information on our future reporting program.
The following reports are scheduled to be tabled in the Autumn 2004 session of Parliament:
• Agricultural disease management;
• Budget development and management within departments;
• Delivery of home and community care services by local government;
• Development of policy advice;
• Managing hospital emergency demand;
• Managing logging in state forests (Part 2);
• Public sector agencies: Results of special reviews;
• Public sector agencies: Results of special reviews and financial statement audits for agencies with balance dates other than 30 June 2003;
• Control and compliance audits: Accounts payable and Procurement; and
• Annual Plan, 2004-05.
International Financial Reporting Standards (IFRS) and the Public Sector
The challenge of transition
The introduction of International Financial Reporting Standards (IFRS) for periods commencing on or after 1 January 2005 will have significant impacts for a broad range of entities across Australia. While media focus has been on the likely impacts for private sector entities, many of these impacts will be equally significant for entities within the public sector.
Public sector entities and their staff must commit to, and take immediate responsibility for, the challenges associated with IFRS. Even if there are few impacts, they need to be identified. An attempt to quantify these impacts early is encouraged.
The issue is urgent for entities with a 31 December balance date. The introduction of IFRS has implications for the work that must be done for 1 January 2004. While the first comprehensive financial report will be dated 31 December 2005, comparatives for the 31 December 2004 must also be presented. Therefore, a need exists to prepare opening balances for the transition period of 2004 at 1 January 2004, being the date of transition. (The date of transition is the beginning of the earliest comparative period to be presented at the time of first reporting under IFRS.)
For entities with a 30 June balance date, the introduction of IFRS has implications for the work that must be done for 1 July 2004.
Statement of Financial Position (Balance Sheet)
This opening balance sheet must be based on the full set of IFRS standards applying during the period up to, and on, 31 December 2005. The International Accounting Standards Board (IASB), does not intend to have completed its work on the standards to comply at 1 January 2005 until 31 March 2004. Then the AASB intends to issue Australian equivalents of these standards by May 2005. Therefore, there is a degree of uncertainty as to the exact content of the requirements to apply at the first reporting date under IFRS. In preparing the opening balance sheet in line with IFRS to apply for 2005 and beyond, it will be necessary to recognise all assets and liabilities required under the IFRS regime.
Any adjustments arising from establishing the IFRS balance sheet at the date of transition will be directly adjusted against equity and not through the income statement (Statement of Financial Performance.)
Financial instruments
Financial instruments, including derivatives, will require recognition, where currently they are off balance sheet, and subject only to note disclosure. The new Australian Accounting Standard, that will be equivalent to IAS 39: Financial Instruments - Measurement and Recognition, will require an increased number of instruments to be recognised on the face of the Statement of Financial Position. In many cases, these will need to be measured at their fair value. While the valuation of financial instruments still retains many challenges for banks and financial institutions, this aspect of accounting and reporting will be uncharted waters for many public sector entities.
Intangible assets
The adoption of IFRS will see a number of accounts currently recognised under Generally Accepted Accounting Principles (GAAP) no longer recognised. For example, where valuation of intangible assets criteria are not met, such intangible items must not be included on the face of future Statements of Financial Position.
Debt
Another significant area for attention is the re-classification of certain items as debt, which previously was equity or quasi-equity. The implication for analysis of the financial position after such re-classifications could be significant for meeting ongoing borrowing arrangements, including existing debt covenants.
Exemptions from the requirements
The overriding principle established by the IASB, and supported by the AASB, is that there will be full retrospective application of all IFRSs that will be effective at the reporting date for an entity’s first IFRS financial report. However, some exemptions from the requirements are available. An entity seeking to use the optional exemptions must apply only the latest version of the IFRS and if it elects to use these optional elections, then it must then use all of the available options.
An example of an exemption available relates to the requirement to use deemed cost if it would involve undue cost or effort in determining a cost-based measure. The option for using deemed cost applies to a number of items including property, plant and equipment, goodwill and the net employee assets and liabilities under defined benefit plans.
First financial report using IFRS
The first financial report under IFRS must include a comprehensive explanation of the transition to IFRS and the significant impacts for the principal financial statements. This explanation must include a reconciliation of equity under existing GAAP to IFRS for both the date of transition and the date of the latest reporting period. The entity must reconcile profit calculated under existing GAAP to IFRS, and provide full explanations of any impairment loses recognised or reversed for the first time in preparing the opening balance sheet.
The reconciliations must have sufficient detail for the reader of the financial report to understand all material adjustments arising from, and distinguished between, changes in accounting policies, changes in estimates and correction of errors.
Is the private or public sector ready for IFRS?
A recent survey of 100 CFOs from the top public and private organisations on transitional issues associated with the move to IFRS by 2005 by the Association of Chartered Certified Accountants revealed some disturbing concerns. For example, “those who indicated that they ‘little understood’ the new standards were generally in smaller organisations, not-for-profit and public sector entities”.
Fifty-four per cent of respondents had not identified the main difference between IFRS and existing Australian Standards, and 68 per cent had not quantified the change. Seventy-three per cent of respondents had not established a timetable for the transition process. Fifty-nine per cent had not decided whether to parallel-run the accounts in 2004 or handle the transition to IFRS in one step in 2005, and 51 per cent had not yet discussed the transition at board level.
These responses show a lack of preparedness and commitment to addressing the implications and issues surrounding the move to IFRS by 2005. All entities now should be planning comprehensively.
The Public Sector Trilogy (AAS 27: Financial Reporting by Local Governments, AAS 29: Financial Reporting by Government Departments and AAS 31: Financial Reporting by Governments)
The IASB has specific responsibility for developing accounting standards for entities in the private sector involved in cross-border transactions. Consequently, it has not addressed the specific requirements of accounting and reporting by entities in the public sector. This responsibility rests, at the international level, with the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC). At the national level, the AASB is responsible for a number of standards specifically established for the public sector, which are currently being redrafted. The major changes being effected to AAS 27, AAS 29 and AAS 31 include:
AAS 27: Financial Reporting by Local Governments
Under current proposals in exposure draft ED 125: Financial Reporting by Local Governments, the existing standard covering local government accounting (AAS 27) will be considerably reduced in content. ED 125 proposes to remove matters already covered in other standards and contain reference only to specific issues.
For example, if implemented, the proposals will remove explicit reference to distinguishing between contributions by owners and others, and of capital expenditure commitments. The concepts of reciprocal and non-reciprocal will be removed in accounting for contributions and revenue.
However, requirements relating to the transfer of assets and liabilities between local governments at no, or nominal, cost will remain consistent with AAS 27. The need to disclose the nature and objectives of each broad function of local government will be retained. Local government entities will be encouraged to report non-financial measures of performance and to disclose performance against budget.
AAS 29: Financial Reporting by Government Departments
The AASB is working on a draft entitled ED 10Y: Financial Reporting by Government Departments. If implemented, it would remove the differences between the requirements for government departments currently in AAS 29 and the requirements for other entities that apply the other standards generally. Where regulations or legislation exist with differing requirements from the standards, they will apply in addition to the standards.
Where a government department is a reporting entity, it will be required to prepare general-purpose financial reports. Unlike AAS 29, ED 10Y does not deem a parent entity in a government department economic entity to be a reporting entity. ED 10Y retains the principal accounting and reporting disclosures relating to the restructuring of administrative arrangements, with minor modifications. For example, the choice of a measurement basis of either fair value or the carrying amount of the transferor is extended from assets to also apply to liabilities. Also, the identity of those departments involved in the transfer must be disclosed.
Perhaps the most significant proposal in ED 10Y requires the disclosure of disaggregated information. This proposal for disclosures of outcomes will permit the assessment of performance and assist in making resource allocation decisions. The proposal will also overcome the shortcoming of the absence of a standard for segmental reporting applicable to public sector entities.
AAS 31: Financial Reporting by Governments
The Financial Reporting Council (FRC) has directed the AASB to both converge and harmonise with IFRS, and harmonise Government Finance Statistics (GFS) and Generally Accepted Accounting Principles (GAAP). GFS is a framework designed and maintained by the International Monetary Fund (IMF) to facilitate macro-economic analysis. Currently, whole-of- government general purpose financial reporting under accrual accounting is documented in AAS 31: Financial Reporting by Governments.
The AASB's approach to this harmonisation project is to focus first on general purpose financial reporting by state, territory and Commonwealth governments. In the second stage, the AASB will address the general purpose financial reporting needs of entities in the general government sector, and the third phase will deal with general purpose financial reporting by other public sector entities including local governments, universities and government business enterprises. However, the AASB does not intend to develop standards for budgetary reporting.
Monitoring the future
In the next edition of Auditing in the Public Interest some of the more significant implications of adopting IFRS will be analysed. Clearly, the Department of Treasury and Finance has the primary leadership role in aiding the public sector to make a smooth transition. We have undertaken to support the department in this area. In the meantime, you are invited to contact Jim Dixon, Assistant Auditor-General, Accounting and Auditing Policy with your IFRS concerns on 03 8601 7033, or to email the details of a particular IFRS issue to jim.dixon@audit.vic.gov.au
General accounting issues
Implications for accountants and auditors of CLERP 9
Since 1997, the Commonwealth Government has engaged in an ongoing review of the Corporations Act 2001 (formerly the Corporations Law) through the Corporate Law Economic Reform Program (CLERP). The most recent stage of this review is a series of proposals known as CLERP 9, Corporate Disclosure: Strengthening the financial reporting framework.
The Commonwealth Government released the CLERP 9 draft provisions and invited interested parties to comment by 10 November 2003. The Australian Council of Auditors-General (ACAG) provided a submission on the proposed changes.
Although the government’s final intentions regarding CLERP 9 is yet to be seen, there is benefit in being aware of the most significant proposals.
As the CLERP 9 title suggests, the focus of these proposed changes is the financial reporting framework – auditors, disclosure of information and better enforcement mechanisms. This focus is the result of a variety of factors. World attention has been drawn to the financial reporting framework following the corporate scandals in the United States reflected in the passing of the Sarbannes-Oxley legislation. In Australia, our recent experiences are reflected in recommendations arising from the HIH Royal Commission, The Independence of Australian Company Auditors (The Ramsay Report) and the Report of the Joint Committee of Public Accounts’ Review of Independent Auditing by Registered Company Auditors.
In the Victorian public sector, the CLERP 9 proposals will largely impact only on those companies incorporated under the Corporations Act. With the increasing numbers of government business enterprises being formed or reconstituted as Corporations Act companies, we are experiencing a significant increase in the number of audit reports issued under this legislation.
Some of the more relevant proposals include:
Auditor independence
• The role of the Financial Reporting Council (FRC) will be expanded to cover oversight of the audit standard setting process, and monitoring and advising on auditor independence. We believe that this role should also be expanded to formulate standards for assurance engagements and to develop guidance material for auditors performing audit and assurance engagements.
• Auditors undertaking a Corporations Act audit will be required to meet a general standard of independence and make an annual declaration that they have maintained their independence.
• Various requirements in relation to listed companies, including disclosure of all non-audit services, restrictions on certain employment and financial relationships, a requirement for auditors (but not audit firms) to rotate after 5 years and an obligation for the auditor to attend company annual general meetings.
Enforcement arrangements
• A Financial Reporting Panel (FRP) will be established to resolve disputes between ASIC and companies regarding the application of accounting standards. We have commented that both companies and ASIC should be able to make referrals to the FRP at any stage of the reporting process.
• Auditing standards will be made legislative instruments in the same way as Australian Accounting Standards Board (AASB) accounting standards. While supporting this measure, we have commented on the need to:
• still provide for the fact that auditing is a judgemental exercise, sometimes involving the exclusion or non-use of particular standards because the risk-based assessment has determined a particular emphasis or focus for the specific audit; and that
• a danger exists that, in adopting a legal framework, the underlying principles will not be appropriately represented and that the outcome will more likely represent a set of rules, which should be avoided.
Measures to better allocate and manage risk
• Auditors will be able to incorporate, and a regime of proportionate liability will be introduced. Incorporation will protect auditors who are not responsible for loss caused by another auditor in the audit firm. Proportionate liability will ensure that liability rests with all defendants in proportion to their contribution to the plaintiff's loss. The proportionate liability reforms are of general application and are not confined to auditors.
Better practice in internal budgeting
Effective budget management underpins an organisation's financial management framework and contributes to effective corporate governance. Well-developed internal budgeting processes can be a key driver in the successful delivery of an organisation’s objectives.
Key areas in the development and management of internal budgets include:
1. Establishing an effective control structure and financial management environment
Effective internal budgeting can only occur where the control structure and financial management environment encourages better practice, and all managers are committed to achieving budget outcomes. An effective internal financial management environment is demonstrated by strong integration of internal budgeting with the organisation’s corporate plans, priorities and external accountabilities. The better practice elements are:
• Establishing organisational commitment: clearly demonstrating executive commitment and ensuring that managers and staff at all levels understand the role and importance of budgeting and financial management in the organisation;
• Integrating budgeting with business planning: ensuring that resource decisions are made in conjunction with business planning, and are consistent with organisational goals and priorities;
• Integrating accrual principles into internal budgets: this enables all managers to operate using the same basis of accountability internally, as well as externally, and to ensure that all resource impacts are assessed in a common way; and
• Aligning responsibility, authority and accountability: so managers clearly understand their responsibilities, are committed to them and have the necessary authority to undertake agreed activities.
Managers are more likely to be committed to internal budgets and working towards meeting budget and financial targets where senior management is actively involved in the budget process.
2. Building an efficient and effective budget development process
Organisations with an effective control structure and financial management environment are well placed to pursue an efficient and effective budget development process. Better practice elements include:
• Identifying components of the budget development process: budget development is assisted by identifying the components of the process and highlighting better practices in each component;
• Systems and tools are available to assist in the process: these help to improve the efficiency of the budget development process and improve reporting, reviewing and managing;
• Selecting the right budget approach: organisations should select a budget approach suitable to their operations. This would include consideration of budgeting techniques such as zero-based budgeting and activity-based budgeting;
• Output driven budgeting: better practice organisations develop internal budgets driven by the outputs that they are required to deliver; and
• Supporting the operational manager: better practice organisations focus attention on enabling the operational manager to develop effective budgets, and on providing them with information, skills and access to expertise to make better-informed resource and financial management decisions.
3. Reviewing and managing financial performance
Reviewing and managing financial performance is an ongoing process undertaken in the ordinary course of operations. It closes the performance loop, enabling management to assess whether the organisation has met targets, is delivering outputs and services efficiently and effectively, and provides signals and direction for the future. Better practice elements of reviewing and managing financial performance are:
• Reviewing budgets during the year: Organisations should have flexibility in the use of resources and be able to move resources to meet emerging needs. It is better practice, to limit the number of changes to the budget so that it does not lose relevance, and significant resources are not tied up in the process of transferring budgets, that have little impact on overall performance or manager’s accountabilities;
• Consistent accountability for performance: Financial performance and monitoring is every manager’s responsibility. Managers should be consistently held accountable for financial performance;
• Forward-looking financial information: Financial information and comparison with budget is enhanced by using projections and associated interpretive information; and
• Integrated financial information: Financial information should not be assessed in isolation from other areas of organisational performance.
The Australian National Audit Office’s Internal Budgeting Better Practice Guide has been adapted by the Victorian Auditor-General’s Office in assessing the internal budgeting practices of 2 Victorian government departments.
The ANAO’s guide can be accessed at www.anao.gov.au
A report on our findings will be tabled in Parliament in Autumn 2004.
Senior staff movements
• Gabrielle Levine, former Manager, Tenancy Services, Department of Human Services, has been appointed as General Manager, Performance Audit.
• Lorensz Senn, Finance and Administration Manager, has taken up the position of Chief Financial Officer at Spear and Jackson.
Further information
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Office Directors and Audit Managers are usually your first point of contact for technical matters. The Accounting and Auditing Policy Group provides technical and policy advice to financial and performance auditors.
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This newsletter is prepared by the Victorian Auditor-General’s Office. Every effort is taken to ensure that the information is accurate. Neither the Office, nor any of its employees, shall be liable on any grounds whatsoever to any party in respect of decisions or actions they may take as a result of using the information contained in this newsletter.
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The information in this newsletter is of a general nature only and is not intended to be relied upon as, or as a substitute for, specific professional advice.
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Further information about any of the issues contained in this newsletter, or about the Victorian Auditor-General’s Office, may be obtained from:
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John Olesky - Manager, Reports and Communications
Victorian Auditor-General’s Office
Level 34, 140 William St
Melbourne Vic. 3000
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Fax: (03) 8601 7010
Email: john.olesky@audit.vic.gov.au
Office website: www.audit.vic.gov.au
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