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AUDITING IN THE PUBLIC INTEREST” REMEMBERING 2005 … LOOKING FORWARD TO 2006 As 2005 draws to a close, it’s useful to look back on the key experiences and events of the year, and anticipate what 2006 will bring. From my perspective, 2005 will be remembered as a year which saw Victoria’s finances in a relatively healthy state; of steadily improving financial management in the public sector; of a relatively pain-free transition to the new Australian equivalents to International Financial Reporting Standards; and enough live examples of immature governance processes to remind us to guard diligently against taking good responsible practice for granted. As this newsletter goes to print, I am about to table my report on the results of 30 June 2005 financial statement and other audits. This report will largely reinforce the comments made above. Financial reports continue to be completed reasonably promptly in the public sector, although some slippage on the government’s earlier announced timelines this year meant that some of those timelines were not met. The financial health of some segments of the public sector, while improved on past years, still requires something more than simply close monitoring to provide the necessary assurance that the price and estimated volumes of activities are appropriately balanced, and that we continue to reinforce the long-term perspective in planning so as to provide certainty to present management practices. This is particularly true around capital development work, but could equally be applied to assessing resource requirements associated with long-term service demand. From the auditor’s point of view, 2006 will see the public sector face the full implementation of the new accounting standards, likely tight reporting deadlines (particularly for 30 June 2006) and possibly increased demands on my Office to respond to ad hoc inquiries. All of these forces require careful management. It is critical in these circumstances that issues are addressed early, for instance, ensuring that the opening balances on the new accounting standards are audited now rather than at year-end. There have been some instances where those balances have been audited by external audit, but on a number of occasions agencies have obtained early assurance from their internal auditors, so as to minimise the risk of problems arising at year-end. I encourage agencies to seriously consider the importance of taking such a step if they haven’t already done so. Likewise, I would also encourage all audit committees to arrange a meeting with their external auditor in March or April 2006 to agree on the timelines, broad parameters of the audit (including assessments around risk) and accounting treatments so as once again to ensure that influences on an audit that can be anticipated are resolved well before balance date. On the broader mandate front, we have completed a number of major inquiries and performance audits during the year. While some have application to particular sectors, a large number of these reports have more universal application. I would commend these to agencies, and particularly their chief executive officers and their audit committees, for their consideration. These reviews are noted in these newsletters. Earlier ones are available on our website. In closing, may I express my appreciation to all those involved in the audit process - both as preparers or as auditors. I wish you all a happy and safe festive season, and look forward to catching up again in the new year. Wayne Cameron Auditor-General RECENT REPORTS TABLED IN PARLIAMENT Follow-up of selected performance audits tabled in 2002 and 2003 (2005:15)
On 27 October 2005, our report following-up 4 performance audits completed in 2002 and 2003, was tabled in parliament. The 4 performance audits were: • The Management of food safety in Victoria follow-up found that there had been some improvement in the regulation of food safety in Victoria since our October 2002 audit. However, there is a need for improvement in compliance with the requirement to undertake annual inspections in around half of the councils visited, and for action by the Department of Human Services (DHS) to address outstanding recommendations arising from our original report. Issues around performance measurement and reporting, improving how DHS and councils work together, and addressing the risk to the effectiveness of the regulatory system arising from the difficulty in finding staff to undertake council food safety activities need to be resolved. We concluded that there continue to be inadequacies in the administration of the regulatory framework and that it is unlikely that this will change to the better while the Food Act 1984 does not require the key agencies to better account for their performance. • The Fire prevention and preparedness follow-up found that considerable progress had been made by the Country Fire Authority, the Department of Sustainability and Environment (DSE) and the Office of the Emergency Services Commissioner in implementing the recommendations of our report May 2003. This includes improved arrangements for coordination of fire management across the state, changes at DSE to implement a “365-day” model of fire management which better balances resources and activities around the year, increases in the fire management work force, and better asset and equipment management. However, long-term challenges remain, and agencies must retain their commitment and sense of urgency. Key issues include the completion of the wildfire component of the Fire Safety Victoria Strategy and long-term work force planning in DSE. • Our follow-up on the March 2003 Drug education in government schools report found that the Department of Education and Training had implemented a number of recommendations to address our earlier recommendations. This includes improving accountability in schools for the delivery of drug education, developing a strategic plan for parent engagement and the implementation of the Drug Education Evaluation and Monitoring Project to measure the success of drug education initiatives. • The follow-up on our October 2002 report Mental health services for people in crisis found that while the Department of Human Services and the Mental Health Review Board had implemented many of our recommendations, it was too early to tell if these steps were sufficient to address the growing demand for mental health crisis services. Auditor-General’s Report on the Finances of the State of Victoria, 2004-05 (2005:16)
The Auditor-General’s Report on the Finances of the State of Victoria, 2004-05 was tabled in parliament on 16 November 2005. It analyses the state’s financial performance and position for the 2004-05 financial year. A substantial operating surplus was generated for the year: $3 962 million for the State of Victoria, of which $2 144 million was for the general government sector (budget sector). While we issued a clear audit opinion on the government’s 2004-05 Annual Financial Report, we included an “emphasis of matter” paragraph in the audit report because, in our view, there is a material inconsistency between the commentaries and explanations contained within the Annual Financial Report (highlights section and chapters 1 to 3) and the audited financial statements. The commentaries and explanations contained within the 2004-05 Annual Financial Report in relation to the net result were not presented in a manner that is consistent with the reporting framework adopted in the audited financial report. References to “A-IFRS net result from transactions”, “net result from other economic flows” and the associated tables on financial performance, though prepared from data compiled from existing accounting standards, were presented in a format that the government has signalled it intends to adopt in the future. These results were not reflected in the audited financial report and, accordingly, have not been subject to audit. The state’s significant operating surplus has benefited from the continued strong performance of the economy and domestic equity markets. These factors have resulted in increased revenues from Commonwealth grants and investment returns. In addition, superannuation costs have remained relatively low due to the impact of high investment returns on the state’s unfunded superannuation liabilities. Our analysis of the state’s financial performance since 1999-2000 shows that while inflation has increased by 14 per cent, state revenue has grown by 34 per cent, and state spending by 25 per cent. While the government needs to continue to monitor factors impacting on its revenue base and rate of expenditure growth, the financial position of the state remains strong. The report also identified opportunities to enhance the disclosures in the Annual Financial Report. We will continue to work closely with the Department of Treasury and Finance on these issues.
Artist’s impression of a section of the new showgrounds site, the Results of 30 June 2005 financial statement and other audits (2005:17)
Our Results of 30 June 2005 financial statement and other audits was tabled in parliament on 15 December 2005. The report sets out: • the results of financial statement audits for 476 state and local government agencies with a 30 June 2005 balance date • the outcomes of 3 special audits, examining progress of the EastLink project; management of the Commonwealth Games Athletes’ Village project; and harness racing industry reforms – adequacy of consultation • an update on the status of an audit of the Regional Fast Rail project. The 30 June 2005 audit round resulted in the issue of 456 clear audit opinions and 11 qualified audit opinions on the financial statements of public sector agencies. The audit opinions on the financial statements of local governments and regional library corporations also referred to “standard” statements prepared by these entities, with 3 audit opinions on “standard” statements subject to qualification. We also issued 92 clear audit opinions and 2 qualified audit opinions on performance statements of municipal councils and regional water authorities. The number of qualified audit opinions slightly increased in 2004-05. This was mainly due to difficulties experienced by some local government entities in complying with the legislative requirements associated with the introduction of more comprehensive “standard” statement reporting in the year. There was some improvement in the time taken by agencies to complete their audited financial and other accountability statements: • 79 per cent of state agencies met the 12-week statutory reporting target (71 per cent in 2004), with improvement evident across most sectors of government and the state’s major agencies • 95 per cent of local government agencies met the 3-month statutory reporting target for that sector (95 per cent in 2004), consolidating the significant improvement made in previous years. This outcome was particularly pleasing, given the additional disclosures required for 2004-05 financial reports associated with the transition to Australian equivalents to International Financial Reporting Standards from 2005-06. Notwithstanding the improved timeliness of financial reporting by agencies, the annual reports of most government agencies were not tabled until the latest possible date allowed by legislation. This needs to improve in future years so that the accountability benefits of completing audited financial statements in much shorter time frames are not compromised. While public sector agencies had generally established effective systems of internal control, our audits found scope for improvement by some agencies - particularly in relation to the implementation of effective risk management (including fraud prevention) frameworks and information technology (IT) controls. The report highlighted the continuing financial difficulties faced by a number of the state’s public hospitals and municipal councils, and the need to strengthen the accountability arrangements for the state’s 1 617 government schools. It also highlighted the increasing incidence of reported fraud across the public sector, requiring ongoing agency attention to ensure that effective prevention strategies are in place. For each of the previously-mentioned special audits, the report identified a need for the relevant audited agencies to strengthen their practices and made several recommendations to assist them. UPCOMING REPORTS Over the coming months, we intend to present the following reports for tabling in parliament: • Strategic work force management in Victoria Police • Managing backlog sewerage connections • Condition of state-owned residential aged care facilities • Access to specialist medical outpatient care in Victoria’s major health services • Meeting the skill requirements of the manufacturing industry • Maintaining Victoria’s rail infrastructure assets • Results of special reviews and other investigations • Results of financial statement audits for agencies with other than 30 June 2005 balance dates, and other audits. Information on these reports can be found on our website at <www.audit.vic.gov.au >, then search under <audits in progress>. 2004-05 ANNUAL REPORT Our annual report for 2004-05 was tabled in parliament on 25 October 2005. The theme of the annual report was Sustainable performance and accountability, and the contents of the report supported our prime purpose of improving performance and accountability in the Victorian public sector. We reported on our activities aimed at: • adding value through our parliamentary reports and services • issuing prompt, high standard audit reports on financial statements • managing our Office through effective and innovative audit operational and financial management strategies. We also provided an up-to-date statement on our responses to the December 2004 independent performance audit of our Office. Some of the highlights contained in the annual report included: • the independent performance audit confirmed that the Auditor-General and the Office are complying with the requirements of the Audit Act: achieving our objectives, and largely operating effectively, economically and efficiently • we met or exceeded our performance targets for the quantity, quality and timeliness of our major audit reports • we achieved an 82 per cent client satisfaction rating (target 80 per cent) from stakeholders on our surveyed parliamentary reports • we issued 99 per cent of our audit opinions (98 per cent in 2003-04) within statutory deadlines • 77 per cent of our audit clients (74 per cent in 2003-04) expressed their satisfaction with the way we conducted our financial statement audits • we commenced a major redevelopment of our financial statement and performance audit methodologies • a Special Investigations Unit was established to conduct special audit reviews and investigations • we launched a new 2004-05 to 2006-07 Corporate Plan. The annual report is available on our website at <http://www.audit.vic.gov.au/reports_annual/agar05cv.html>.
A-IFRS REPORTING CHALLENGE FOR UNIVERSITIES AND TAFE INSTITUTIONS All universities and TAFE institutions are among the first Australian reporting entities to prepare financial statements using Australian equivalents to International Financial Reporting Standards (A-IFRS) at 31 December 2005. Hence, they find themselves in the front line of addressing the emerging challenges associated with the new accounting framework. Following the commitment by the Commonwealth Government in June 2002 to implement sector neutral accounting standards across both the private and public sectors, the Victorian Auditor-General’s Office has endeavoured to assist its many client agencies in the transition to A-IFRS. While many issues have been addressed, a number of accounting and reporting matters still require clarification and resolution. This article outlines the most contemporary concerns of preparers and auditors for universities and TAFE institutions reporting at 31 December 2005. Consolidation of subsidiaries For the purpose of accounting under A-IFRS, most universities and TAFE institutions will no doubt satisfy the definition of a not-for-profit entity, but what about their subsidiary companies? Are they for-profit or not-for-profit entities? It is important to ensure that the appropriate classification is applied as there are differing accounting requirements between for-profit and not-for-profit entities which would directly impact on an entity’s financial position and performance. In the absence of any authoritative guidance from the Australian Accounting Standards Board (AASB) to assist in distinguishing a for-profit entity from a not-for-profit entity, the Australasian Council of Auditors-General has prepared a guidance paper which sets out a number of criteria to be considered in distinguishing between a for-profit and a not-for-profit entity. A copy of this guidance paper is available on our website at <www.audit.vic.gov.au>, <reports and publications>, <good practice guides and other guidance>. Once the classification of an entity has been determined, consideration will need to be given to where consolidation is required of a for-profit and not-for-profit entity as AASB 127 Consolidated and Separate Financial Statements requires consolidated financial statements to be prepared using uniform accounting policies. Our Office is of the view that material subsidiary companies would need to prepare 2 sets of financial statements if the accounting policies used in preparing their separate financial statements differ from those of the parent. Superannuation There have been claims by some university superannuation funds that they are unable to provide individual universities with data to satisfy their accounting and disclosure requirements associated with defined benefit plans on the basis that the funds cannot reliably allocate the fund assets and defined benefit obligations to the participants of the funds. While expressing disappointment to these claims, our Office notes that AASB 119 Employee Benefits provides relief to participants to a multi-employer defined benefit plan to account for the plan as if it were a defined contribution plan where sufficient information is not available to use defined benefit accounting. Accordingly, our Office will accept entities accounting for such multi-employer defined benefit plans in accordance with the less demanding requirements of a defined contribution plan if there is a statement in writing from the fund and/or actuary to support the unavailability of data. Another related issue for the education sector is the ability for universities to recognise the reimbursement from the government associated with settling their defined benefit obligations. Under the previous Australian Generally Accepted Accounting Principles and the current A-IFRS framework, the concept of probability is used in the recognition of an asset. However, AASB 137 Provisions, Contingent Liabilities and Contingent Assets and AASB 119 Employee Benefits states that a right to reimbursement from another party for the settling of an obligation can only be recognised when it is virtually certain that the reimbursement will be received. In UIG Action Alert 04-8, the UIG members concluded that UIG Abstract 51 Recovery of Unfunded Superannuation of Universities should be superseded by the A-IFRS. UIG members agreed that the assessment of virtual certainty should be made by universities rather than the UIG. In light of this stance, our Office is of the view that universities will be able to continue the recognition of a receivable from the government as a separate asset under A-IFRS. Revenue recognition The AASB is proposing to issue a guidance to reflect a “re-interpretation” of the requirements of the contributions standard. Under ED 144 Proposed Australian Guidance to accompany AASB 1004 Contributions, the recognition of income will depend on whether there are conditions attached to the contribution. For the purpose of the guidance, a condition is a stipulation where the contribution will have to be returned if the assets are not used as specified. Consistent with existing requirements, a recipient will continue to recognise income once they have control of the contribution if there is no condition attached to the contribution. What is different now is that if there are conditions attached to a contribution, the recipient will recognise an asset and a corresponding liability on the initial recognition of the contribution. Income will subsequently be recognised with a corresponding reduction in the liability as the obligations attached to the contributions are fulfilled. It is the AASB’s intention to have the proposed guidance to AASB 1004 for application for reporting periods beginning on or after 1 January 2005. In other words, the proposed re-interpretation may impact on the way that contributions are recognised by entities with reporting periods ending on 31 December 2005. OUR NEW FINANCIAL AUDIT TOOLSET LAUNCHED It’s not often that we in the auditing business have something to shout about – such occasions are few and far between. When they do arise, the opportunity is too good to miss, and such is the case with the launch of our new financial audit toolset, “ipsam”, which stands for integrated public sector audit methodology. The new methodology was officially launched in early November 2005 and represents another step in the continual progression of our Office. The new methodology consolidates on earlier audit methodology developments of our Office, which included moving to automated working papers in the early 1990s, and the internal development of our own electronic financial audit methodology (EFINA) in 1998. Developed in collaboration with the Queensland Audit Office, “ipsam” is a Lotus Notes-based product. It combines electronic audit files and policy and guidance material, as well as a range of other help and guidance databases. It caters for the changes in the auditing profession and the benefits from the substantial technical developments that have occurred since the development of EFINA. The development of “ipsam” marks the first occasion that 2 audit offices have collaborated in a joint venture to develop public sector audit software. The fact that the project has come in on time and on budget was especially pleasing. Such an outcome was only achievable through the focused endeavours of all those involved in the project.
(from left) David O’Neill and Shaun Mayfield (both from the Queensland Audit Office), and From our Office’s perspective, a collaborative approach to the development was appealing on 3 counts: • Knowledge. Access to the significant intellectual capital of the 2 audit offices. • Rigour. The collaborative approach, with a focus on ensuring all policies, guidance and as far as practical, procedures were consistent, would ensure that the development of these items would be subject to rigorous questioning and debate. This level of rigour would go a long way to ensuring that the final product would be of a high standard. • Costs. The additional governance costs would be substantially offset by substantial cost sharing between our 2 offices. To date, it seems that the benefits anticipated in the joint business case have been largely achieved, although the true test of this may be some time down the track. Having established a common financial audit platform, other opportunities offer themselves for exploration – such as through the development of common training modules supporting the new toolset. These experiences reinforce the benefits of joint collaboration indicated earlier. Other audit offices have already expressed their interest in this product. SENIOR STAFF NEWS • Dr David Gowland, Director, Financial Audit, has completed his secondment with the Office and has returned to RMIT University. • Ray Winn has taken up the position of acting Director, Performance Audit. • Kim Lazenby, formerly acting Director, Performance Audit, has commenced a 12-month secondment with the Western Australian Audit Office. • Peter Vetsicas has taken up the position of acting Director, Computer Audit Group. OFFICE EXHIBIT AT THE 2005 ROYAL MELBOURNE SHOW
Our office exhibit at the Each September, the Office stages an exhibit at the Royal Melbourne Show. The Government Pavilion at the showgrounds has been the traditional venue for the exhibit. However, with major redevelopment works currently underway at the showgrounds, and the unavailability of the pavilion, a new site enabled government and semi-government organisations to continue to showcase their initiatives, products, services and achievements to the community. Around 350 000 people visit the Government Expo over the 11 days of the show. The exhibit is a key component of our Office’s communications strategy – particularly our interaction with the community. Our participation is aimed at broadening the community’s understanding of our important financial management and accountability role. The Office realises that the venue is primarily one for families and, as such, our exhibit was focused on providing a fun and educational experience for visitors of all ages. Our exhibit featured a corporate information area, as well as a “Wizard with Numbers” audit game and hooky game activity. The quality of our exhibit was acknowledged this year by being awarded second place in the “Best display by a government or semi-government authority”. First place was awarded to the Department of Sustainability and Environment, and Koorie Heritage Trust/Community History Awards came in third.
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