AUDITING IN THE PUBLIC INTEREST”
NEWSLETTER, AUTUMN 2006

TIMELY REPORTING AND SUCCESSFUL OUTCOMES

For most of us in the public sector audit and finance arena, Autumn of 2006 means preparing for financial year-end in the context of new accounting standards, new auditing standards, the application of a new electronic toolset, including detailed audit guidance and electronic working papers, undertaking audits of major agencies which are relocating, and of seeking to retain skilled finance staff at a time when the demand for such staff is high across the nation.

In Victoria, that focus is further affected by a number of significant external factors such as the hosting of the Commonwealth Games and the Grand Prix in March and April, and the state election scheduled to be held in November 2006. The latter event requires that the financial reports and associated reports on operations of state government bodies need to be finalised promptly, and to be made ready for publication by no later than 4 October 2006, the scheduled last day when both houses of parliament are sitting.

When we factor all of these influences into our plans, we quite naturally ask ourselves “are we adequately prepared?”. From an audit point of view, the key way to prepare is to plan for audit work to be undertaken early, identify key issues at an early stage and seek to resolve them early with audit clients. Increased planning and attention on the completion of interim audit work reinforced by hard-close procedures on the April and May financial reports of agencies act as good stepping stones to achieving good effective audit outcomes. Having said that, an auditor can only anticipate so much. A successful audit outcome requires a collaborative arrangement where both the auditor and the auditee work together toward that goal.

A key player in ensuring that audit outcomes are effective and timely is the audit committee. There is clear evidence that audit committees in the Victorian public sector are becoming increasingly effective at the agency level and in facilitating the resolution of issues coming to their attention. I have asked audit personnel to bring forward their audit planning for this year, and to make early contact with auditee staff and audit committees so that the audit processes for 2006 can be efficiently expedited.

Wayne Cameron

Auditor-General

ANNUAL PLAN, 2006-07

We are currently preparing our Annual Plan for 2006-07 which will outline our proposed work program and resource requirements for the coming year.

The plan provides details about our products and services, targets and expected outcomes for each of the following 2 output areas in 2006-07:

• parliamentary reports and services

• audit reports on financial statements.

The proposed work program for parliamentary reports will include details about our major areas of audit interest in the coming year. We use selection criteria to prioritise the areas of audit interest to guide the development of the annual plan. The selection criteria used in prioritisation are:

• potential financial, environmental and social risks to the community

• high public interest and/or materiality of public resources

• potential for improved resource/financial management

• potential for enhanced accountability.

In accordance with the provisions of the Audit Act 1994, we are required to consult with the Public Accounts and Estimates Committee on the draft plan and this will occur in April/May. Our Annual Plan, 2006-07 is expected to be tabled in parliament on the first sitting day of 2006-07.

UPCOMING REPORTS FROM OUR OFFICE

Over the coming months, we intend to present the following reports for tabling in parliament:

• Managing backlog sewerage connections

• Access to specialist outpatient care in Victoria’s major health services

• Strategic work force management in Victoria Police

• Meeting the skill requirements of the manufacturing industry

• Public sector residential aged care facilities

• Maintaining Victoria’s rail infrastructure assets

• Results of financial statement audits for agencies with other than 30 June 2005 balance dates, and other audits

• Road safety – Strategies to address speed and speeding

• Follow-up of selected performance audits.

Information on these reports can be found on our website at <www.audit.vic.gov.au>, then search under <audits in progress>.

RECENT REPORTS BY THE PUBLIC ACCOUNTS AND ESTIMATES COMMITTEE

Report on a legislative framework for independent officers of parliament

Victoria’s 3 officers of parliament – the Auditor-General, the Ombudsman and the Electoral Commissioner – occupy a unique and valued position in the tradition of the Westminster model of democratic government. They each play an important role in assisting parliament in discharging its scrutiny and accountability functions.

On 8 February 2006, the Public Accounts and Estimates Committee issued its Report on a legislative framework for independent officers of parliament. The report contains the results of the committee’s inquiry into an appropriate legislative framework for Victoria’s 3 independent officers of parliament.

The committee’s inquiry revealed that the current legislative framework applying to these officers is inconsistent in a number of areas, for example, on issues concerning their appointment, tenure, budgets and accountability arrangements, and there are few formal links between parliament, the Ombudsman and the Electoral Commissioner.

In relation to the Auditor-General, the committee noted that, with the exception of parliament determining the Auditor-General’s remuneration and the annual budget of his Office, all the characteristics of the officer of parliament model are reflected in the Audit Act or the Constitution Act.

The committee made 17 recommendations to protect and support the operational independence of the 3 officers of parliament and their agencies, and to recognise and reinforce the principle that the primary relationship of officers of parliament in terms of accountability and responsibility should be with parliament.

The committee’s report can be found at <http://www.parliament.vic.gov.au/paec/reports.html>.

Review of the report on the performance audit of the Victorian Auditor-General’s Office

On 2 March 2006, the Public Accounts and Estimates Committee released a report dealing with the committee’s response to an independent performance audit of the Victorian Auditor-General’s Office, initially prepared by Mr John Phillips of Acumen Alliance in December 2004.

The overall findings of the performance auditor were that the Victorian Auditor-General and the Victorian Auditor-General’s Office were complying with their legislative mandate and Australian auditing standards. The Office was also seen as substantially achieving its corporate objectives and, by reference to other Australian audit offices, was largely operating effectively, economically and efficiently. The performance auditor also identified and targeted areas for improvement and recommended ways in which the operations of the Office may be made more efficient and effective.

The chair of the committee, Ms Christine Campbell MP, said that the Victorian Auditor-General’s Office has a very important role in the Westminster system of government in assisting parliament discharge its accountability obligations to the Victorian people. Ms Campbell stated that she was confident that the Office, after implementing the changes recommended by the independent auditor and the committee, would be well placed to meet the challenges ahead.

The committee’s report can be found at <http://www.parliament.vic.gov.au/paec/reports.html>.

VISITORS FROM BRITISH COLUMBIA AUDIT OFFICE

During March 2006, we hosted 2 visitors from the Office of the Auditor-General of British Columbia – Mr Bill Gilhooly (Deputy Auditor General) and Mr Marshall Petrie (Director).

Mr Gilhooly and Mr Petrie held discussions on a broad range of financial management and operational issues with staff from our Office, as well as with senior representatives from the Department of Treasury and Finance.

The visitors were especially interested in the Estimated Financial Statements review procedures that we undertake each year, and were provided with detailed insights into the planning processes, methodology and audit procedures utilised for the review. Other aspects of the Office’s operations were also looked at during the visit, including the new IPSAM financial audit methodology, performance audit activities and the IT function.

Mr Bill Gilhooly, Deputy Auditor General (centre), and
Mr Marshall Petrie, Director (3rd from right), held
discussions with staff on our audit activities.

IMPLEMENTATION OF WIRELESS DATA COMMUNICATIONS NETWORK

Auditors, by the nature of their work, are a very mobile work force. In our business, staff work all over the state, for example, Bendigo, Shepparton, Ballarat, Geelong, Frankston etc. They generally stay at a particular location for relatively short periods of time, often only for a few days. Our auditing practice is dependent on many computerised processes, for example, audit work papers, email, time recording and billing. It is, therefore, quite difficult to provide fast data communications facilities for staff to connect back to the Office network in Melbourne.

We have recently commenced deploying a secure, wireless data communications network with statewide coverage, to allow our staff to connect to the Melbourne Office network. Feedback from the earlier pilot testing, and now the production deployment, is excellent. Several other audit practices are closely monitoring the success of our initiative.

It is very early days in the utilisation of wireless data communications technology and we expect the speed to increase significantly and cost to decrease in the next few years. This is a major technological improvement in our business. This means we will be able to complete our work more quickly and conveniently.

Adam Ryan assisted with trials on a new wireless access technology which
will allow field staff to access our computer network remotely.

AUASB “FORCE OF LAW” STANDARDS

Why are auditing pronouncements under scrutiny?

HIH, OneTel, WorldCom and Enron. Do these company names ring a bell? They certainly should as they were all high profile corporate failures. The recent corporate collapses have resulted in a loss of trust in the current financial reporting and auditing frameworks. So what can be done to safeguard against such disasters occurring again? The answer partially stems from the re-issue of existing auditing standards, so that they will now have the “force of law”.

The passing of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 [CLERP 9] heralded a new age in auditing standard-setting. The Corporations Act 2001 charges the Auditing and Assurance Standards Board (AUASB) with the responsibility of issuing auditing standards, which will have the “force of law” from 1 July 2006. The issue of the last group of exposure drafts (EDs) in mid-December 2005 brought to 36 the total number of EDs issued, and represents the release of the final batch under phase one of the project (see Figure 1). These new and revised auditing standards will be applicable for periods beginning on or after 1 July 2006 and, therefore, will in most instances apply to 30 June 2007 audits for the first time.

FIGURE 1: AUASB WORK PROGRAM

Role of the AUASB

The work of the AUASB in setting auditing and assurance standards forms part of the corporate governance framework in Australia. The importance of sound public interest-oriented standards is necessary to reinforce the credibility of the auditing process for those who use audited financial information.

On 1 July 2004, the AUASB was reconstituted as a Commonwealth statutory body under CLERP 9. The Financial Reporting Council (FRC) is responsible for oversight of the AUASB. The FRC has given the AUASB a strategic direction to develop auditing standards and related guidance for auditors and providers of other assurance services that have a clear public interest focus and are of high quality.

Re-issuing auditing standards as legal instruments

The AUASB has adopted a 2-phased approach to the review and re-issue of statutory auditing standards, now that they will have legal status under the Corporations Act 2001.

Phase 1: This phase concentrates on the enforceability of the mandatory (black letter) requirements in the auditing standards, clarifying guidance in the auditing standards and inclusion of improvements originating from other international standard-setting bodies. The review and re-issue of auditing standards with a period of public exposure and finalisation of the auditing standards as legal instruments, was planned to be completed by 31 March 2006, with a monitoring by the AUASB of the re-issued auditing standards through the legislative instruments process in parliament, during the remaining period up to 30 June 2006. Other proposed changes and improvements will be undertaken during Phase 2. The main changes to existing auditing standards include replacing the term “should” with “shall”, aligning the standards to their international counterparts and elevating previously implied obligations from grey letter to black letter. In line with the AUASB’s public interest mandate, auditors will not be permitted to depart from the mandatory requirement of an auditing standard, unless rare and exceptional circumstances outside their control prevent them from complying with such requirements.

Phase 2: This phase will commence after the new Phase 1 auditing standards are in place, at 30 June 2006. This phase will be an ongoing project and will involve further review and revision of the auditing standards, and may incorporate future clarity enhancements from international standards. Phase 2 will focus on reviewing the auditing standards to improve quality, clarity, layout etc., and will occur in line with the priority to be set by the AUASB.

Drafting rules

The pre-existing auditing standards were written for a self-regulatory environment, so re-drafting is needed to give the standards the “force of law”. It helps users identify the mandatory requirements of the auditing standards.

Where to from here?

In the first half of 2006, the AUASB will finalise its auditing standards and progressively communicate with its stakeholders about the final roll-out of the new auditing standards. From the second half of 2006, the AUASB will move to the next phase in the revision of the pronouncements. It will focus on the review and re-issue of auditing and assurance standards and related guidance for other purposes, such as the existing AUS 806 Performance Auditing, and the review and re-issue of Auditing Guidance Statements that were not dealt with in Phase 1 of the Auditing Standards Project.

Reviewing and re-issuing the auditing standards benefits both auditors and the public. Auditors will benefit from using auditing standards which have been re-drafted to provide greater certainty by clarifying auditors’ obligations, and that conform with International Standards on Auditing. The public will benefit from reinforcing the credibility of the auditing process, which will be achieved by promoting a public interest focus. Implementing the Commonwealth Government’s decision to create legally enforceable auditing standards will enhance the credibility of audited financial reports in Australia, improve investor confidence in the capital markets and reduce the likelihood of any future corporate collapse.

IPSASB NEWS

International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board (IPSASB) set out the requirements for financial reporting by governments and others in public sector organisations.

Our Office, in conjunction with the Australasian Council of Auditors-General (ACAG), has recently provided submissions on the following IPSASB exposure drafts (EDs):

• ED 25 Equal Authority of Paragraphs in IPSASs

• ED 27 Presentation of Budget Information in Financial Statements

• ED 28 Disclosure of Financial Information about General Government Sector (GGS).

With the consensus of ACAG, we are proposing to provide a submission in response to the following ED, which is due by 30 June 2006: ED 29 Revenue from Non-exchange Transactions (including taxes and transfers). The objective of this proposed standard is to prescribe requirements for the financial reporting of revenue arising from non-exchange transactions, other than non-exchange transactions that give rise to an entity combination. The ED deals with issues that need to be considered in recognising and measuring revenue from non-exchange transactions, including the identification of contributions from owners.

ENHANCEMENTS TO OUR WEBSITE

Index of issues contained in reports and publications

Visitors to our website at <www.audit.vic.gov.au> may be familiar with our “search this site” facility. While this facility enables a search of key words, it may also provide multiple “hits” in relation to a specific audit topic or audit reports.

To cater to the numerous requests we receive seeking information about actual or possible topics contained in our reports and publications, our website now features a specific area in the “Reports and Publications” section called “Index of issues contained in reports and publications”. The list contains topics commented on in our reports over the past 20 years. The list, in a PDF format, is in alphabetical order, and can be searched by key words within the PDF.

Earlier reports added to website

We have recently added to the number of earlier Auditor-General’s reports available on our website. Performance audit reports dating between 1982 and 1993, and other reports dating between 1991 and 1995 have been added to our website in bookmarked PDF format.

STAFF NEWS

Senior staff movements

• David Reid, General Manager, Financial Audit, appointed as General Manager, Business Support and Special Investigations Group – from 31 January 2006.

• Andrew Greaves, Director, Financial Audit, appointed as acting General Manager, Financial Audit – from 31 January 2006.

New graduate intake

In February 2006, 13 new graduates commenced with our Office – 12 into our Financial Audit Group and one to our Performance Audit Group.

Our first year graduates undertake a 2-day induction program, followed by on-the-job training with their appointed supervisors. Graduates in their first year participate in a regular professional development program covering technical and non-technical training courses. They also participate in a 12-month mentor program aimed at further developing their professional and personal skills, as for most of our graduates, this is their first experience at full-time employment.