ACCOUNTABILITY AND THE AUDITOR-GENERAL

Presentation to students undertaking the
Master of Policy Program, Monash University

By Wayne Cameron,
Auditor-General of Victoria

27 April 2000

The accountability framework

Under our system of government, Parliament (as the elected representatives of the people) is the final authority in the administration of public money.

Under a Westminster parliamentary system, power is placed into the hands of the elected government and its designated Ministers, and (through delegation) to public sector administrators managing on behalf of government. Acceptance of that power entails the obligation to be accountable for its use and responsibility for the consequences of this use.

An important element of the responsibility of the Executive Government is to make decisions affecting the direction and management of the State’s financial resources and its operations. The government of the day, in return, has an obligation to account to the Parliament and, in turn, to the community for its use of public funds and resources.

Parliament sets the standard for accountability

One of the constitutional obligations of Parliament is to monitor the operating performance of the Executive Government. Parliament, through its process of debates and through the operations of its committees, has the function of reviewing the performance of government in relation to its financial and resource management of the State.

Role of parliamentary committees

One of the important elements in the monitoring process is the joint parliamentary committee system. Currently, there are 7 joint investigatory committees of the Parliament, of which 2 are specific-purpose committees. The current committees and their respective roles are summarised below:

• Scrutiny of Acts and Regulations Committee. This Committee considers all Bills introduced in the Parliament to determine whether a Bill trespasses upon rights or freedom in terms of content, administrative and legislative powers and parliamentary scrutiny. The Committee also assesses the implications of a Bill on the powers and jurisdiction of the Supreme Court of Victoria under section 85 of the Constitution Act 1975. Other functions of the Committee include the scrutiny of subordinate legislation, and the review of redundant and unclear legislation.

• Law Reform Committee. Inquires into, and reports to, Parliament on any proposal concerned with legal, constitutional or parliamentary reform or with the administration of justice, excluding joint standing orders of Parliament or the rules of practice of the Parliament. It also examines and reports to the Parliament on any proposal relating to law reform in Victoria.

• Environment and Natural Resources Committee. Inquires and reports to Parliament on any proposal, matter or thing concerned with the environment, natural resources or with planning the use, development or protection of land.

• Public Accounts & Estimates Committee (PAEC). The role of the PAEC is discussed in detail in this paper.

• Family and Community Development Committee. Reviews and investigates matters associated with the family or the welfare of the family, as well as a range of social issues dealing with community development and the role of the government in community development and family welfare.

• Roads Safety Committee. This is a specific purpose committee that inquires into any proposal, matter or thing associated with road trauma or safety on roads, and related matters.

• Drugs and Crime Prevention Committee. This a specific purpose committee that considers matters concerned with the illicit use of drugs including the manufacture, supply or distribution of drugs for (such use) or the level or causes of crime or violent behaviour.

Under the Parliamentary Committees Act 1968, a joint investigatory committee is required to “inquire into, consider and report to the Parliament” on matters referred to it:

• by either a resolution of the Assembly or Council; or

• by an Order of the Governor in Council.

A joint investigatory committee may also inquire and report to the Parliament on any annual report or other document that is relevant to the functions of that Committee, which is tabled before either House of Parliament. It is under this latter provision that the Public Accounts and Estimates Committee (PAEC) examines matters raised in Auditor-General’s reports and communicates its findings to the Parliament.

The PAEC, whose membership is drawn from both Houses and the different political parties (chaired by a Government Member), is a key player in ensuring adequate accountability for the use of public financial resources. It has the legislative ability to examine issues, conduct public hearings at which evidence can be recorded, and table its reports for parliamentary and public debate.

Special characteristics of public sector accountability

Accountability exists in the private sector, but is different in nature to that which is found in the public sector. Private sector financial accountability models are frequently characterised as that of the accountability of companies to their shareholders, mainly expressed through the requirements of corporation’s law.

One of the main mechanisms for achieving financial (and performance) accountability in the private commercial world is through the provision of audited financial statements and other performance data, by management, that informs shareholders and other interested parties (e.g. creditors) about the performance of the private sector entity. An entity’s profits (which are reflected in the share price) influences investment and business decisions. It could be said that private sector entities are held accountable through their bottom line, and through the strength of their balance sheet.

The public sector, by its very nature, differs from the private sector, and this has implications for the nature of, and the mechanisms used to achieve, accountability. Two significant differences are:

• The objectives of the public sector are not related to profit maximisation or wealth creation, as is generally the case in the private commercial sector, but rather to the achievement of a diversity of often competing social, political and economic goals for the benefit of the public at large. This diversity of objectives means that “bottom line” accountability is often inadequate in the public sector.

• Those who participate in business ventures (regardless of the form of business) do so voluntarily - it is their capital that is at risk. Governments, on the other hand, have the power to compulsorily acquire financial resources through taxing the community. Taxpayers accept this compulsory power, but in return expect that these resources be used for the ultimate benefit of the community. In other words, taxpayers expect that there will be full accountability for the use of such resources in terms of probity, legality, economy, efficiency and effectiveness.

In view of such differences, accountability in the public sector takes on a special significance. Accountability in the public sector will, therefore, by necessity be of a broader dimension than private sector accountability because it is multi-faceted as is the multifarious interests in its performance by the public.

Role of the Auditor-General

The Auditor-General provides a critical link in enforcing the accountability process

The position of Auditor-General was first established in Victoria in 1851 as the external auditor of government on behalf of Parliament. In the early days, the Auditor-General was actually a Member of Parliament. Today, the position of Auditor-General is that of an independent officer of the Parliament.

Before undertaking the duties of office, an appointee to the position of Auditor-General must take an oath of office before the Executive Council. The oath requires the Auditor-General to discharge the duties of the office “according to the law… without fear favour or affection”. This implies that the Auditor-General must be beyond the influence of politics, impartial in the conduct of the duties of his office, and beyond reproach as to his/her honesty and integrity. These elements are critical if the Auditor-General’s credibility as an independent reviewer is not to be jeopardised in the eyes of the public.

The key to the importance of the role that the Auditor-General plays in the accountability process lies in his independence of control by either Parliament or Executive Government. In this role, the Auditor-General is required to conduct regular, independent investigations and reviews of public sector agencies and report (to Parliament) on their financial management and administrative practices, in order to enhance public sector accountability and performance.

In the wider context, the Auditor-General is a protector of the public interest by guarding against extravagance, wastage or loss of taxpayers money, and ensuring that government services are delivered in an equitable, economic, effective and efficient manner to the benefit of all Victorians.

Range of audit responsibilities

The Auditor-General’s principle aim is to improve accountability and encourage economic, efficient and effective use of public resources in Victoria. I am currently responsible for the audit of the financial affairs and activities of around 550 public sector organisations, which include, the Parliament, government departments, public bodies, business enterprises, superannuation funds, health services, universities and other educational institutions, municipal councils and water authorities.

Reports of the Auditor-General

The Auditor-General plays a significant role in the accountability process by providing independent and objective reports to Parliament on the quality of financial and resource management of public bodies. Those reports contain recommendations and suggestions for improving financial and resource management and reinforcing accountability within public sector agencies.

In order to maximise the usefulness of the role of the Auditor-General in this process, progressive enhancements have been made to the quality of content and format of Auditor-General’s reports to Parliament. While traditional matters such as financial operations and legislative requirements continue to be reported, the scope of issues contained in the reports issued by the Office have for some years now, encompassed wider performance audit issues dealing with the assessment of economy, efficiency and effectiveness in resource management throughout the Victorian public sector.

Each year, the Office presents 3 types of reports to Parliament:

• Report on the finances of the State (during the Spring Session);

• Reports on the results of audits (by ministerial portfolio) (during the Autumn and Spring Sessions); and

• Performance audit reports on the results of individual performance audits.

The Annual Report on the operations of the Office is also transmitted to Parliament, as will be for the first time (this year) our Annual Plan.

 Audit findings and recommendations addressed in these reports to the Parliament include:

• the degree to which value for money has been achieved for taxpayers’ dollars,

• the effectiveness of organisations in meeting government objectives;

• the quality of management and use of resources;

• observations about management practices and administrative systems;

• the quality of accountability provided to Parliament; and

• compliance with legislative and other requirements.

The conduct of audits

Recent history

In December 1997, amendments made to the Audit Act 1994, took away the Auditor-General’s authority to conduct audits in his own right. Under the Audit (Amendment) Act 1997 the Auditor-General was required to appoint “authorised persons” following a process of contestability, to carry out both financial and performance audits.

A new government statutory body, Audit Victoria, staffed initially by personnel transferred from the Auditor-General’s Office and operating under a Board of Directors appointed by the Government, was established under the legislation to participate in this contestability process, along with private sector providers.

Prior to 1977, achievement of the Auditor-General’s legislative mandate of providing high quality professional audit services to the Parliament, the Government and public sector agencies, was accomplished predominantly with the resources of the Office, and where deemed to be appropriate, through the use of private sector practitioners under contract to the Auditor-General.

Financial audits: For many years, the Office had, at its own initiative, discharged its financial audit responsibilities through a combination of in-house staff and private sector resources contracted to assist in the audits. All in-house staff had accounting qualifications.

These audits were conducted using the Office’s risk-based audit methodology. In 1997-98, the Office expended $5.5 million on the engagement of private sector firms to assist the Auditor-General in the conduct of financial audits.

Contestability arrangements were introduced progressively to contract all financial audits from 1 July 1998.

Performance audits: Prior to 1997, all performance audits were conducted by in-house staff with qualifications and practical experience in a range of disciplines, such as program evaluation, social sciences, economics, science and finance. To complement the multi-disciplinary in-house staff, external specialists were engaged (following a competitive tendering process) to provide specific advice and assistance to the Office, to ensure a credible outcome on those audits where skills and knowledge in the subject area was unavailable. Performance audits were conducted in accordance with the Victorian Performance Audit Methodology, which was developed by the Office.

As a consequence of the application of contestability to performance audits, the 1997-98 financial year represented the final period during which all performance audits were conducted by in-house staff.

When addressing the 13^th Australian and Pacific Regional Seminar of the Commonwealth Parliamentary Association, my predecessor’s commented on the enforced contestability arrangements for financial and performance audits. He said:

“In my view the removal of my rights and the capacity to conduct audits when deemed appropriate seriously compromises my operational independence”.

It is fair to record that these changes to the legislation as they affected the operational independence of the Office were not welcomed either by the Office, or a large component of the informed community. The loss of powers for the Auditor-General became an election issue, the results of which saw a change in government. The incoming government strongly recognised the need to fully restore the operational powers of the Auditor-General and protected his independence within legislation.

The current context

The Audit (Amendment) Act 1999 repealed the Audit (Amendment) Act 1997 and restored to the Auditor-General control over the audit process. The position of Auditor-General was enshrined in the Constitution Act 1975 with complete discretion in the performance or exercise of his functions or powers. The Constitution Act states that the Auditor-General is not subject to direction from anyone in relation to:

• whether or not a particular audit is conducted;

• the way in which a particular audit is to be conducted; and

• the priority to be given to any particular matter.

Audit Victoria was abolished with effect from 1 January 2000, thereby returning operational capability to the Auditor-General. In addition all references to “authorised persons” (in the Audit Act 1994) relating to the conduct of performance and financial audits and section 15 reports, have been removed in order to restore to the Auditor-General the discretionary power to determine how audits are resourced in the future.

Following the 1999 amendments to the audit legislation, the Office has temporarily suspended the contestability process, and decided to roll forward existing contracts, pending strategic consideration of the level and impact of outsourcing of audits in the future.

The independence factor

Few governments, however democratic, appreciate having the full range of their activities subjected to independent analysis and evaluation. No matter how efficient they are, from time-to-time governments are vulnerable on the issues of propriety and regularity of expenditure, on the economic and efficient resources, and on the effectiveness of the programs they have implemented.

The changing face of government

In response to pressures on public sector resources in the eighties and a belief by both conservative and labour governments that the public sector was unable to meet all the service expectations of the electorate, the emphasis in the use of public sector resources changed from a concern with the concept of stewardship to one of providing services in the most efficient and cost-effective manner. Central to this philosophy was a shift from accountability for inputs to a focus on the relationships between inputs and the resulting outputs and outcomes.

Governments embraced the purported advantages of competition in public service provision, which has seen an increase in the use of private sector providers for public services. Increasingly, governments have become purchasers of services, rather than service providers.

Outsourcing, corporatisation and privatisation is commonplace in today’s public sector with a significant range of traditional public sector activity in private hands. For instance, in Victoria, the supply of water and electricity has been privatised, as has part of the prisons system.

In Victoria’s recent history, the increase in the outsourcing of government activity had been accompanied by a concentration of power in the hands of Executive Government, departmental secretaries and public sector management.

Some implications of outsourcing

Some of the implications of contracting-out public sector activity include:

• growth in the use of commercial confidentiality claims as a means of restricting access to government information;

• changes in the concept of accountability, which focuses more on considerations of financial efficiency and cost related targets than on concepts of public interest;

• changing notions of public interest (contracts limit the number of interested parties, whereas “public interest” recognises a wider range of constituents);

• increased opportunities for corruption in the contracting process; and

• a diminution in the challengability of contracts due to the privity of contract.

In his 1996 Report on Ministerial Portfolios my predecessor stated:

“In recent years I have been increasingly confronted with claims that information that I propose to include in my reports to the Parliament was regarded as being ‘commercially confidential’, and I am concerned that such claims may escalate as outsourcing of activities becomes more prevalent”.

My predecessor’s concerns prompted the PAEC of the 53^rd Parliament to commence an inquiry into the issue of commercial confidentiality. However, when Parliament was prorogued in August 1999 the findings had not been released.

The inquiry was reopened by the PAEC of the 54^th Parliament and its report, Commercial in Confidence Material and the Public Interest was tabled in Parliament on 5 April 2000. The PAEC found that the Auditor-General and the Ombudsman must be given unrestricted powers to access commercially sensitive information for the purpose of performing their duties, and that these rights should be legislated. Other key findings of the report were:

• the impetus for classifying information as commercial in confidence had come from within government, not from the private sector, and that this was unacceptable and contrary to the spirit of the Westminster system of governance;

• as a general principle, information should be made available unless there was a justifiable reason for withholding it;

• the Auditor-General and the Ombudsman should have the right to publish information when it is in the public interest to do so;

• the blanket protection for trade secrets was unnecessarily wide and required clear guidelines;

• that a number of documents relating to government contracts should be brought within the ambit of the Freedom of Information Act;

• much of the material for which commercial confidentiality had been claimed was unlikely to stand up to serious scrutiny as being legitimate; and

• the present rules and guidelines around disclosure of information about tenders and contracts were inadequate.

Another significant obstacle to accountability, resulting from outsourcing, had been the right of access to information held by private sector contractors. Evidence of past secrecy and suppression of information is now being seen in the current Royal Commission’s inquiry into the letting of the Intergraph contract.

The most effective safeguard from any attempt to interfere with the audit process is the legislation - Audit (Amendment) Act 1999.

Independence of the Auditor-General is fundamental to the audit process. In order to objectively provide credible assurance to Parliament on governmental performance, the Auditor-General must:

• be free from control by Parliament and Executive Government;

• have access to all information on which an agency has based its statements of accountability; and

• have the ability to report without restriction.

These factors are the essence of auditor independence.

The Audit (Amendment) Act 1999 sought to strengthen the Auditor-General’s independence by enshrining the position of the Auditor-General in the Constitution Act 1975 and strengthening his/her operational independence through amendments to the Audit Act 1994.

The Constitution Act establishes the Auditor-General as an independent officer of the Parliament. The Governor in Council appoints the Auditor-General on the recommendation of the Parliamentary Council. Prior to amendment, the Governor in Council appointed the Auditor-General on the recommendation of the Executive Government of the day. This amendment reflects the importance given to the relationship between the Auditor-General and Parliament and recognises that the Auditor-General should be free from the control of Executive Government.

Other provisions in the Constitution Act regarding the Auditor-General’s independence deal with:

• The Auditor-General’s freedom from direction by anyone concerning the performance or exercise of his/her functions or powers (discussed earlier); and

• The termination of an Auditor-General’s appointment. The Act provides that the Auditor-General may only be removed from office by resolution of both Houses of Parliament. In addition, the legislation requires due cause to be shown to justify termination. This provision protects the Auditor-General from the influence of the Executive and cements the special relationship of the Auditor-General with Parliament.

Several amendments to the Audit Act 1994 have provided the Auditor-General with greater operational independence. These include:

• The sole power to carry out or designate an auditor to carry out an audit in his behalf. (This point was discussed earlier in the paper.);

• An extension of the Auditor-General’s mandate to auditing the performance indicators of authorities;

• An expansion of the Auditor-General’s performance audit mandate, to allow the scope of such audits to cover the operations/activities across the whole of the Victorian public sector, rather than be restricted to a single authority as was the case under previous audit legislation; and

• Provision for the Auditor-General to include in a report any information that he/she considers relevant to the subject matter of that report and is in the public interest - this provision should overcome some of the difficulties experienced by my predecessor when faced with reporting information claimed to be commercially confidential.

Proposal for further amendments to the Audit Act 1994

The changes to the Constitution Act and audit legislation (passed by Parliament in the Spring 1999 Session) were of major significance in restoring the independence of the Auditor-General. However, I believed that there was potential for further strengthening the independence of the Auditor-General and the Auditor-General’s relationship with Parliament. Consequently, I have suggested further amendments to the audit legislation for consideration by the Government. These proposals include:

• Immunity for the Auditor-General and staff;

• Access to records of private sector contractors to government;

• Publication of information claimed to be commercially in confidence obtained from private sector contractors. This is an extension of the amendment passed in the Spring 1999 Session, which gave the Auditor-General the right to report information that is in the public interest;

• Extension and/or clarification of the scope of the Auditor-General’s audit authority, as it applies to the:

• non-judicial activities of courts and other judicial bodies,

• administrative framework of Parliament; and

• administrative actions of Ministers;

• Power of the Auditor-General to undertake audits at the specific request of the Treasurer;

• Capacity to table reports out of Session;

• Threshold for delegation of the Auditor-General’s power to audit financial statements; and

• Linking of the Auditor-General’s salary with an appropriate benchmark.

Interaction with parliamentary committees

The satisfactory resolution of issues raised by the Auditor-General is a significant measure of the Office’s effectiveness in the performance of its audit function on behalf of Parliament and the community. Parliamentary committees play an important role in this process in addressing specific matters raised in reports by the Auditor-General.

It is through liaison with the Public Accounts and Estimates Committee (PAEC) that the Auditor-General’s relationship with the Parliament is principally put into effect. The Auditor-General and senior executives of the Office are regularly called upon to assist the PAEC with its inquiries and investigations, to:

• give evidence on the work of the Office;

• elaborate on the findings contained in Auditor-General’s reports tabled in Parliament; and

• provide information on improvements that could be made to the management of public sector resources in Victoria.

The Office also provides research assistance to the PAEC through the secondment of an officer(s) every year.

The Audit Act 1994 provides for the annual performance audit program to be determined by the Auditor-General in consultation with the PAEC. The legislation also provides for the cost of performance audits to be met from moneys appropriated to the Parliament.

The Auditor-General’s accountability to Parliament is also facilitated through the PAEC. The PAEC engages private sector auditors to conduct annual financial statement audits, and triennial performance audits, of the Office.

Recent changes to the audit legislation introduced through the Audit (Amendment) Act 1999 reinforces the special relationship of the Auditor-General with the Parliament by introducing further accountability and reporting provisions for the Auditor-General. These provisions require the Auditor-General to:

• Prepare a draft annual plan for consideration by the PAEC, before it is finalised and transmitted to the Parliament. The Auditor-General must have regard to any comments received from the PAEC before finalising the annual plan;

• Confer with, and have regard to, any audit priorities determined by the PAEC; and

• Determine the Auditor-General’s budget in consultation with the PAEC.

Budget review role

In March 2000, the Premier introduced legislation giving new responsibilities to the Auditor-General. The Financial Management (Financial Responsibility) Bill 2000 would make Victoria the only jurisdiction in the world that requires its Auditor-General to review the State Budget financial estimates each year. Key features of the Bill include:

• quarterly Budget sector financial reports and a half–yearly Budget update;

• twice-yearly statements of the Government’s financial objectives and strategies;

• a requirement for the Government to state the assumptions and risk assessments on which the Budget is based; and

• a pre-election Budget update by the Secretary of the Department of Treasury and Finance when a general election is called.

On the day that the Government presents its Budget to the Parliament, the Auditor-General is required to provide assurance as to whether:

• the estimated financial statements have been prepared on a basis consistent with the accounting policies on which they are stated to be based;

• the statements are consistent with the targets specified in the current financial policy objectives and strategies statement for each key financial measure specified in that statement;

• the statements have been properly prepared on the basis of the assumptions contained in the accompanying statement to the estimated financial statements; and

• the methodologies used to determine those assumptions are reasonable.

Summing-up

In summary:

• Accountability is what gives governmental institutions their democratic character. Where accountability is deficient, one is likely to find inefficiency, and autocratic, and possibly corrupt, management;

• Members of Parliament and Ministers of State are not only chosen by the people, but exercise their legislative and Executive powers as representatives of the people. In the exercise of those powers they are accountable to the people for what they do;

• Accountability in the public sector is seen in a number of ways:

• first, there is political accountability of Members to electors in free elections;

• second, there is accountability of Ministers to the Parliament for all matters within their ministerial responsibility;

• third, there is financial accountability to Parliament, in that all public money is appropriated by Parliament and the Executive is accountable to Parliament for the expenditure of those moneys;

• fourth, there are accountability mechanisms created under the framework of administrative law; and

• finally executive agencies are subject to the scrutiny of bodies such as the Auditor-General and the Ombudsman.

• Increasingly, governments have turned to the private sector for the provision of public services through outsourcing;

• Current public sector accountability mechanisms are difficult to apply to outsourced activities since private sector service providers are not accountable through Ministers to the Parliament, there is limited scope for the application of administrative law mechanisms and current audit legislation precludes the Auditor-General from accessing information held by private sector contractors; and

• Refinements to the audit legislation will continue to be examined in order to address accountability issues resulting from outsourcing, and also further reinforcing the Auditor-General’s independence and the Auditor-General’s relationship with Parliament.