Auditing in the Public Interest

AN EVENTFUL AND VERY BUSY YEAR

May and June saw the tabling of 3 performance audit Reports, namely, Represented persons: Under State Trustees' administration; Building control in Victoria: Setting sound foundations; and Reducing landfill: Waste management by municipal councils, and our annual report on the results of audits (Report on Ministerial Portfolios).

In June, we presented our first draft work plan for the coming year to the Public Accounts and Estimates Committee for review, prior to the plan being tabled in the Parliament in accordance with the changed accountability arrangements for the Office.

The June financial audit round welcomed us with open arms! Given that this is my first year experience of the audit cycle,

I hadn't quite appreciated that 426 of our total 549 financial statement audits have 30 June balance dates, and that they all come into the Office in the months of August and September (some a little later, but who's counting?). That's 78 per cent of our financial statement audits!

In the meantime, the window of opportunity to table any remaining Reports in the Parliament begins to close by the end of November and in that month 4 more Reports were tabled, namely, the Report of the Auditor-General on the Finances of the State of Victoria, 1999-2000, and 3 performance audit Reports: Non-metropolitan urban water authorities, Services for people with an intellectual disability and Grants to non-government organisations.

On the representational side, I have to confess to not getting out and about as much as I would have liked – those that I was able to share thoughts with at various parliamentary, local government and accounting profession forums were both enjoyable and rewarding, and I look forward to building on those relationships in 2001.

REPORTS TABLED IN THE PARLIAMENT DURING SPRING 2000

The Spring 2000 Session of the Parliament was a busy parliamentary reporting period for the Office.

Report of the Auditor-General on the Finances of the State of Victoria

The Report of the Auditor-General on the Finances of the State of Victoria, 1999-2000 was tabled in the Parliament on 14 November 2000, and outlined the results of the annual audit of the Government's Annual Financial Statement.

The following key audit observations were made in the Report:

• The State achieved an operating surplus, prior to abnormal items, of $1.8 billion for 1999-2000; $919 million lower than last year. The operating surplus for the year after abnormal transactions was $1.2 billion;

• The net asset position of the State improved by $3.7 billion to $41.2 billion at 30 June 2000;

• The standard of disclosure in the Annual Financial Statement has been much improved in recent years. This year, the Government included the value of future financial commitments relating to outsourcing and infrastructure development, amounting to $4 billion, into the Statement. While this has been an important step forward, further work in this area is required to ensure all material contracts are included in the Statement;

• Consideration should be given by the Government to the presentation of a more comprehensive range of performance indicators in future Annual Financial Reports, to enhance the usefulness of these Reports in facilitating assessments of the Government's performance and stewardship;

• Our analysis of key financial performance indicators shows that the State's financial condition has strengthened during the 1999-2000 financial year; and

• The Report also commented on certain major activities of the State, e.g. staging of the Grand Prix, financing of the 2006 Commonwealth Games, the Community Support Fund and certain BOO/BOOT schemes in the water industry.

Signing of the 2006 Commonwealth Games Host city contract.

If you require further information on this Report, please contact Steve Mitsas on (phone) 03 8601 7000, (fax) 03 8601 7010 or email to: steve.mitsas@audit.vic.gov.au

Non-metropolitan urban water authorities: Enhancing performance and accountability

This performance audit was contracted-out to an Ernst & Young-led consortium which included Culley Knipe & Associates and Connell Wagner. The in-house team comprised Ian Claessen and John Arnol, and the Report was tabled in the Parliament on 16 November 2000.

The audit, which covered the 15 water authorities located in regional Victoria, involved the:

• identification of the key drivers (including examples drawn from well-performing agencies) and constraints (including recommendations) affecting performance in relation to customer service, water management, environmental management, commercial practices and corporate governance;

• development of a framework of good practices (and relevant examples) that could contribute to enhancing performance; and

• provision of an assurance as to the appropriateness, accuracy and completeness of performance information reported to the Parliament and the community for the year ended 30 June 1999.

Recommendations that arose from the audit centred around pricing, water conservation, trade waste discharged to sewers, water quality, co-operation among authorities, competition and performance indicators. Some of the more important recommendations were:

• To obtain the appropriate economic outcomes throughout the water industry, pricing should reflect costs. Transparent subsidies can then be applied to those towns and industries that the Government might want to support;

• Consideration should be given by the Government to improving consistency and control of trade waste discharged to sewers and regulating liability for damage caused by those discharging waste; and

• The Department of Natural Resources and Environment should develop a more appropriate set of externally reported performance indicators, include greater prescription in the way in which definitions are to be applied and introduce an appropriate audit regime. Consideration will be given by the Auditor-General to applying his powers under the Audit Act to audit the reported performance indicators on an annual basis.

If you require further information on this Report, please contact Ian Claessen on (phone) 03 8601 7000, (fax) 03 8601 7010 or email to: ian.claessen@audit.vic.gov.au

Services for people with an intellectual disability

This major performance audit was undertaken by Deloitte Touche Tohmatsu under contract. Jan Tranter and Tony Brown comprised the in-house team. The Report was tabled in the Parliament on 21 November 2000.

In examining the Department of Human Services' management

of services for people with an intellectual disability, the audit addressed:

• resource allocation processes in terms of equity and consistency with legislation;

• safeguards to protect clients;

• quality of services;

• monitoring arrangements; and

• accountability arrangements.

The audit focused on case management, shared supported accommodation and community access services including day programs. Visits to 35 services provided by both the Department and non-government organisations formed an integral part of the audit.

In terms of recommendations, the audit found that there was scope for improvement in the service framework and its implementation. A wide range of recommendations was made in the areas of planning for individuals and protecting their rights, the provision of resources, service quality and monitoring of service performance. Some of the more important recommendations included:

• The case management model used by the Department requires amendment to better match the needs of people with an intellectual disability, including those at risk of regularly returning to case management because of their circumstances or personal characteristics;

• The Department's review of legislation should include consideration of options for strengthening and, where relevant, clarifying the:
  • statutory provisions relating to the use of restraint and seclusion;

  • monitoring role of the Intellectual Disability Review Panel; and

  • scope of reviewable decisions;

• Mechanisms should be established to support the operation of the protective framework, particularly mechanisms that can better enable people with an intellectual disability to exercise their rights to participate in decisions made about them, and to make a complaint or have decisions reviewed where they are dissatisfied; and

• The Department should improve the information it publishes for public accountability purposes. This should include the annual publication of consolidated information on trends and interstate comparisons for performance in respect of all major service activities.

If you require further information on this Report, please contact Jan Tranter on (phone) 03 8601 7000, (fax) 03 8601 7010 or email to: jan.tranter@audit.vic.gov.au

Grants to non-government organisations: Improving accountability

This performance audit, which was conducted by Ray Seidel-Davies and Rocco Rottura from the Office, reviewed grants administered by 4 departments (totalling $121 million) and 4 municipal councils (amounting to $11 million). In total, 51 non-government grant recipients were visited by audit using powers provided under section 20 of the Audit Act 1994. The Report was tabled in the Parliament on 22 November 2000.

The audit assessed whether:

• grants had been applied for their intended purpose and in an economic, efficient and effective manner;

• agencies had a sound administrative and accountability framework; and

• the provision of grants had contributed to the achievement of the broad objectives of the relevant program.

Recommendations were made in relation to the accountability framework, the planning and operation of grant programs, associated monitoring, and grant program outcomes. In particular, some of the major recommendations that emerged from the audit were:

• the definition of "grants" requires clarification to incorporate grants, subsidies, sponsorships and donations;

• agencies need to adopt more comprehensive planning processes, develop guidelines on what constitutes a conflict of interest and the action to be taken in such circumstances;

• agencies need to develop and implement accountability requirements for recipients that reflect the underlying risk and materiality of the grant; and

• agencies need to ensure that adequate procedures are in place for monitoring grant recipients, including specifying reporting requirements in agreements and verifying outputs or outcomes achieved.

If you require further information on this Report, please contact Ray Seidel-Davies on (phone) 03 8601 7000, (fax) 03 8601 7010 or email to: ray.seidel-davies@audit.vic.gov.au

And just a reminder ...

Copies of all Reports of the Auditor-General are available from the Victorian Auditor-General's Office at Level 34, 140 William Street, Melbourne Vic. 3000, (phone 03 8601 7000), or from the Information Victoria Bookshop at 356 Collins Street, Melbourne Vic. 3000 (local call cost 1300 366 356).

Reports of the Auditor-General are also available on our website at www.audit.vic.gov.au  Our site features a "search this site" facility which enables users to quickly identify issues of interest which have been commented on by the Auditor-General.

Our site statistics indicate that we have around 4 000 web page accesses each week, mainly seeking information contained in current and past Auditor-General's Reports. Why not visit the site … and don't forget to bookmark the site for future reference.

TIME TO REFLECT

The Victorian Auditor-General's Office has a long and distinguished history, dating back to the colonial period. Next year will mark the 150 year anniversary of the appointment of the first Auditor-General for Victoria, and to commemorate the occasion the Office has engaged Dr Peter Yule to author the Office's history.

The publication of a history will aim to provide an outside perspective of the Office's evolution over the 150 year period.

Of particular interest will be the reflections on more recent years which will draw on the personal recollections of many current and former staff, and other parties with whom the Office has had a close association.

ISSUES ARISING FROM FINANCIAL STATEMENT AUDITS

Of the Office's 426 financial statement audits for the financial year ended 30 June 2000, 128 are undertaken by our Financial Audits Group and 298 are undertaken by external audit service providers. The period between the end of the financial year and the end of October is, therefore, a busy period for our Accounting and Auditing Policy Group (AAPG) where audits completed by external audit service providers are reviewed and finalised prior to the Auditor-General's audit report being signed and issued. 

The role of the AAPG also involves dealing with technical issues arising from the audit process, including evaluating proposals for audit report qualifications and making recommendations to the Auditor-General. These activities take place through a Technical Issues Committee (TIC). During the 30 June 2000 audit round, the TIC dealt with 113 submissions, either from the Office's Financial Audits Group or from external audit service providers. This activity resulted in:

• 64 qualified opinions;

• 35 removal or non-continuation of qualified opinions from the prior year; and

• 14 matters resolved as a result of modifications to the financial report by an audit client prior to issue, advice on a policy position or acceptance of an accounting treatment proposed by an audit client.

Revaluation issues in local government

The Local Government Act requires that all assets of local government entities be revalued at 1 January 2000, and this caused considerable difficulty for the sector. As a result, a number of qualified audit reports were issued due to the failure by entities to revalue all of their assets or to undertake an appropriate revaluation process, e.g. failure to undertake a "condition assessment" as part of determining a written-down replacement cost of infrastructure assets. A condition assessment is necessary to provide relevant and reliable financial information. A direct and specific condition assessment of an entity's assets at the point of revaluation provides an objective measure of remaining service potential and, therefore, a more reliable valuation.

Treatment of grants

In the health sector, the treatment of grants received in advance for specific purposes remains an issue, as it does in other sectors. Accounting Standard AAS15 "Revenue" requires recognition at the time the funds are received, as they represent a grant that is non-reciprocal in nature. The reporting of those funds as revenue recognises that the entity has gained control over future economic benefits, thereby increasing its resources at that point in time. These amounts should be treated as revenue when received, rather than reported as deferred income to be brought into the operating statement at a later date.

CONTESTABILITY AND AUDIT ROTATION POLICY

The Office has adopted a policy of moving to a position of resourcing a minimum of 35 per cent of its financial statement audits internally, in all sectors, by 2004. Underpinning the plan is the need to ensure that the Office maintains a representative audit presence and capability in each sector. Implementation of the plan to optimise the balance between work undertaken by the Audit Operations Group and external audit service providers over this period will be influenced by operational considerations, existing contractual arrangements, the viability of the Office's audit portfolios for external audit service providers, and will involve discussions with audit clients and external audit service providers.

In addition, the Office is also moving to adopt "best practice" by introducing a policy to rotate the external audit service provider for each audit client every 5 years. This is designed to maintain independence and promote best practice in audit methodology. 

The process for rotating external audit service providers through the tendering of audits in the future will involve:

• seeking expressions of interest/demonstrations of competence from prospective external audit service providers for audits to be tendered;

• evaluation by the Office of the expressions of interest and selection of external audit service providers from which formal tenders will be sought; and

• formal tender process and appointment.

AUDIT SERVICE PROVIDERS' FORUM

The Victorian Auditor-General's Office recently held an Audit Service Providers' Forum and issued an Update to its Financial Audit Service Providers' Manual, relating mainly to the education sector. The purpose of the Forum and the Update was to provide a concise overview of audit issues that an audit service provider needed to take into consideration in conducting a financial statement audit of a public sector entity's financial report for the financial year ended 31 December 2000.

Each audit service provider conducting an education sector financial statement audit has received a copy of the Update, a copy of the Department of Education, Training and Youth Affairs' (DETYA) financial reporting guidelines and a copy of the TAFE Financial Reporting Framework. In addition, audit service providers are able to access the updated Manual on the Office's web page at www.audit.vic.gov.au

The Forum provided an opportunity for staff from the Strategic Planning and Sector Liaison Group, and Accounting and Auditing Policy Group to liaise with audit service providers and in-house audit operations staff who are responsible for undertaking financial statement audits in the education sector for the upcoming audit cycle.

The Forum was well attended and the participants received presentations from:

• Wayne Cameron, Victorian Auditor-General, who opened the Forum with a welcome speech and a personal presentation of recently appointed staff;

• Rob Fearnside, Liaison Director – Education, who provided an overview of the Victorian education sector and recent developments;

• Murray Poustie, Manager – Contracts and Tendering, who covered the most pertinent points relating to TAFE institute reporting, as discussed in Section 12 of the Manual;

• Greg Pound, Assistant Auditor-General – Accounting and Auditing Policy, who reviewed the recent developments in the auditing field and outlined the Office's expectations with respect to the process of submissions to the Office's Technical Issues Committee;

• Yves Tawil, recently appointed Director – Contract Management and Audit Quality, who introduced himself and outlined the Office's objectives and expectations with respect to the review process and audit service provider deliverables for the December 2000 audit cycle;

• Veronique Row, Senior – Accounting and Auditing Policy, who discussed recent developments in financial reporting which are applicable as at 31 December 2000; and

• Erik Hopp, Director – Accounting and Auditing Policy, who provided an overview of the update to DETYA reporting requirements and highlighted specific financial reporting issues in the education sector.

The Forum was well received and provided an important interface between the Office and its audit service providers.

SENIOR STAFF MOVEMENTS

Bruno Dinelli

Bruno Dinelli, Director, Contract Management and Audit Quality, resigned in August 2000 after 30 years with the Office. Bruno had extensive experience as a Director with overall responsibility for audits within the energy, water and education sectors.

Marlene Van Kerckhof

Marlene Van Kerckhof, Director, Organisational Development and Human Resources, resigned in November 2000. Marlene was previously Head of Human Resources with the former Audit Victoria and transferred to the Office in January 2000.