CHALLENGES AND ISSUES FACED BY THE LEGISLATIVE AUDITOR

Presentation to
Public Sector Auditing Conference, Kuala Lumpur

By Wayne Cameron,
Auditor-General of Victoria

6 October 2003

Not understanding the environment remains one of our greatest ongoing challenges. We need to understand the:

• environmental influences:

• global and national influences

• changes in the way governments do business

• changes in accounting and audit

• influences on audit expectations

• trends in public sector audit

• audit issues and challenges.

Environmental influences

Corporate collapses

Recent corporate collapses have led to:

• a loss of public confidence in accounting (standards) and auditing practices

• much soul searching in Europe, USA and Australia

• responses by governments in each country

• a significant impact on the insurance industry and the availability of PL/PI cover. They have affected those with whom a government does business, e.g. contractors unable to get cover, community activities have been curtailed. There is now a risk of government exposing the taxpayer when promises of support are made.

Sarbanes/Oxley

Sarbanes/Oxley:

didn’t just deal with the USA, and didn’t just focus on corporate responsibilities

• impacts on branch activities in other countries

• imposes personal requirements on individuals (including CFO).

Accounting and audit standards

Ramsey Review ® - Issue of FI “Revised standards on Independence”.

CLERP9 Proposals ® - Will see auditing standards have the force of law. Are legislative auditors bound by these standards? In Victoria, I am - so I have a direct interest in what occurs.

Corporate governance debate

There is a flood of guidance now available, e.g. ASX, OECD, IFAC, ANAO.

The debate does influence public sector agency thinking, yet many of the governance concerns in the private sector are unique to that sector, e.g. insider trading; non-independent audit etc.

It is important that the public sector response is done in a public sector context.

It’s also important for the public sector to respond. Auditors-General will be expected to provide leadership.

Government reforms will impact on the effectiveness of audit

Therefore, the audit focus in the context of any reforms is to:

• take the time to understand the reforms

• offer timely comment on the impact of any reform proposals.

We need to provide guidance where possible, e.g. on the privatisation process/oversight of PPPs etc.

Some may say that privatisation introduces a private sector culture with the associated expectations of private sector audit and accountability practices - I’ve got news for these people. So long as it all remains part of the public sector, then public sector requirements continue to apply. This leads to some tension and needs to be sorted out by ministers.

Compare Victorian experience with C-I-C contracts. A Public Accounts and Estimates Committee inquiry found that it was public servants who more frequently instigated C-I-C contracts; not private sector contractors.

Devolution and decentralisation

There are oftewn mixed practices – centralists having difficulty letting go, e.g head office.

For devolution to work effectively, one needs good information systems. Devolution can bring about fewer prescribed risks and procedures; but that heightens the risk of adverse consequences and presents fresh audit challenges.

Auditor-General of Canada said that “Accountability also implies a specific very strict procedure. Empowerment is not just a random process. The delegator must give the delegate the authority, resources and control needed to achieve the results they have agreed on. Without these tools, the delegate cannot be held accountable. Similarly, the delegate must demonstrate that those resources and that authority have been used properly and must give an accounting of the results”.

Outsourcing

It’s important to have access to contractor records, e.g. Intergraph.

• S.11 - Power to call for persons and documents and examine on oath.

• Contract management issues - Police IT review

Privatisation

Much has been done in Victoria throughout the 1990s, but some of the arrangements are beginning to unravel, e.g. LaTrobe Hospital, St Vincent’s Hospital financing arrangements, rail franchises – the latter is complicated by the number of different parties involved and the government interests in security, asset renewal, fare evasion etc.. It al comes back to risk management.

Loss of corporate knowledge and about process

Interestingly enough, this is not just an issue for entity management but also for the auditor in getting explanations for transactions, particularly if staff have moved on or the real knowledge about the transaction lies with the contractor.

Reform legislation

Many nations have expressed their reform intent through legislation. In NZ, this has been done through the Public Finance Act, SOE Act and Public Service Management Act. Similar changes in legislation occurred in the UK and Australia. These changes are often philosophically as well as economically driven, e.g. separation of policy from operations. There is greater autonomy to operating agencies, and contestable supply and advice to government.

Accompanying these changes is greater devolution to CEOs, within the parameters of what is expected of those officers and their staff in upholding public service values, such as transparency, equity, ethical behaviour etc.

Impact of technology

Technology improves the opportunity for government to link data warehouses across government functions. But this needs increased collaboration over data definition and processing roles, and it does require interagency collaboration. Compare our observations on data on student assessments held by DEET and The Curriculum Authority.

Technology could lead to recentralisation and whole-of-government approaches to some functions, e.g. electronic procurement system in Victoria, and payroll (under consideration) at a national level.

Audit expectations

There is concern about not meeting stakeholder expectations.

Constant trade-off over the varying interests of these different stakeholders, - Government, agencies, Parliament, Opposition, the community, the media etc.

Lots of potential audits – wide mandate but limited resources.

How do we maximise/leverage greatest impact.

Catalytic role, versus Full Assurance role.

Ethical Public Service

The rate and nature of change has tested the level of understanding of the ethical values of the public service. In years gone by these value were handed down through custom and practice, however with the changes and breaks in continuity we can no longer rely on custom and practice. Values need to be codified, taught and reinforced through daily actions.

The advent of business persons on boards of public sector agencies means there has to be an induction process to acquaint Board members with public sector expectations, practices and values. How else are they expected to know?

Audit Committees

• Received much focus in the corporate governance debate following Corporate Collapses.

• Required in Victorian MOF Directions.

• Independence of Members, competency, sign off authority. Link to Internal – External Audit

• One of the challenges is in getting competent/knowledgeable people who are independent.

Environmental Influences

Changes in Accounting & Audit

Recent CPA study on balance Sheet Management.

Knowledge about public sector accounting by standard setters is very limited. The purposes of accounting in private sector (with its focus on Balance value and return on investment) are quite different to the public sector – which is more about economic impact and stewardship.

Thus although through the adoption of accrual accounting, the positives do outweigh the negatives, we need to ensure that the overriding requirements of the P.S. are met in changes to accounting standards.

Key protagonists in accounting reform in the Public Sector have been Auditors-General and Treasurys (but the later are largely staffed by Economists – who have a different view of the purpose of accounting).

AG’s – must continue to influence the shape of the PS Accountability model. Take an active part in the standard setting process – both Nationally and internationally (eg INTOSAI and ASOSAI), and with the accounting profession.

Must follow the lead of Pat Barrett and
“support the acceptance of, and commitment to, the view that the PS should be exemplary in its accounting practices and adherence to relevant standards and ethical behaviour.”

Leadership also in corporate governance.

Auditing Standards

• Review of wording of Audit Opinions

• New Guidance note issued by AuASB “Improving Communication between Auditors and Shareholders”

• Work on Auditor Independence

• Harmonisation with international auditing standards

• Role of INTOSAI!

Accounting Standards

• Harmonisation activities with IAS yet IAS are for the corporate sector.

Trends in Public Sector Audit

Importance of effective control environment in the Public Sector best captured in the GAO’s 1994 Yellow Book: 4 aspects of internal control:

1. “Control environment – is the overall tone set by top management to reflect its attitude, awareness and actions relative to internal controls.

2. Safeguarding controls – are controls that prevent or detect, on a timely basis, unauthorised transactions and unauthorised access to assets resulting in possible losses material to the financial statements.”

3. Controls over compliance with laws and regulations: - are important to auditors in identifying the types of potential mis-statements that could occur and the factors that could affect the risk of material mis-statement.

4. Control risk assessments – are critical in determining the nature, timing and extent of audit test to be performed.”

Adding Value (through the audit process)

• Audit effort should seek to have a lasting, positive effect.

• How best to achieve this.

As Pat Barrett put it: “While I regard F.S. auditing as our bread and butter, performance audits offer considerable scope for adding real value to public administration.”

Professor Ian Ball “The more constructive your role can be the better, assuming that your goal is see government performance and its reporting, enhanced.”

Trends in Product Range

• •A.O. activities extending to production of Better Practice Guides, and conduct of Benchmarking studies – all of which is designed to meet the goal above – ie improve public sector performance and accountability.

• •Is it auditing? Is it within your statutory mandate?

• •I recall discussion with NAO 25 years ago when talking about legislative scope, me arguing for specificity, the much more experienced British agency, arguing for broad principles to guide audit effort. See recent amendments to Audit legislation in Victoria.

Real time Auditing

• •At present we audit Annual Accounts

• •But who audits ¼ by WOG Outturns? Should they be Audited?

• •Audit of Budget – Vic/Act.

Special Enquiries

• •Referred by Government

• •Referred by other statutory Offices such as the Ombudsman

• •Referred by MPs and the community

Growing in level of activity. Discretion to respond must still be our own. Develop criteria to guide consistency in response.

Be clear about where outcome will be reported – Take care not to compromise your independence (operationally or in reporting).

Audit Issues and Challenges

Strategic Audit Planning

• Run through our processes, including Environmental scanning, External Consultative Committees, role of PAEC on the draft Plan and tabling of the Annual Work Plan.

• Ideally, audit topics chosen should synchronise with those that decision makers are facing and those that Parliament and the Community regard as important.

• Choice of audit determined against explicit criteria developed by VAGO and included in Annual Plan.

• Striking the “right balance” between assurance services to Parliament and “advisory services” (working with government to enhance efficiency/effectiveness/ accountability).

Right Product Mix

• Reports to the Executive

• Reports to Parliament

• Guidance through best practice statements

• Large or small audits

Right legislative Framework

Important that audit legislation keeps pace with changes in the way government conducts its business. In particular in the areas of access and reporting powers (an issue in Vic. Re C-I-C where disclosure normally restricted. – I have now been given power to not only access but decide on which disclosures are necessary in the public interest.

Transparency in Audit intentions/activities

• AG to be accountable and transparent c.f. Victorian model.

• Audit of the AG – Financial and Performance.

• Consultation with Parliament over planned audits.

• Interest by Executive about audit intentions, including completion.

Staff Competencies

• Financial Audit – IT skills, loss of knowledge in internal controls.

• Performance Audit - multi skilled workforce;
- use of contracted specialists to supplement staff skills eg medical, engineering etc.

• Recruitment and retention issues.

• Staff turnover issues.

Audit Methodology

• Importance of remaining abreast of developments in Auditing practice (especially with peers and private sector).

• Heavy investment costs for DIY solution.

• Cost of private sector methodologies, training and maintenance is high.

• Efficient and Effective audit processes – through methodologies that maximise E&E eg Risk based and use IT.

• Availability (for purchase) of reputable private sector methodology becoming increasingly difficult.

• Ability to tailor private sector methodology requires modification and resource. eg Compliance aspects (will speak more about this on Tuesday).

Impact of Audit on client

• Be conscious of how your staff act out their audit role. If you want a compliance oriented risk adverse public service you may be one of the reasons for that outcome.

• If on the other hand you want the public service to focus on innovation and performance – you may need to ensure your audit activity supports that kind of behaviour.

Balance between assurance and guidance roles

• Timing of the intervention – earlier the better but at what point do you cross over into the Executive’s role! e.g. LPP audit, Sustainable Forestry Audit.

Audit Scope issues

• With outsourcing often faced with not being able to audit the actual activity but have to examine regulatory effectiveness instead. eg Building Inspectors, City Link.

• Few legislative Auditors can comment on policy.

• But where does the policy line start and stop.

• What is policy and what is administration.

• C.f. our current audit of policy capability.

Proper Records

• Advent of emails and less formal means of communications.

• Are they kept on file? Are they held for archive?

• Are there clear filing and back up procedures.

• Changes over time together with the increase in volume of material stresses traditional record keeping practices.

• Pertains to self as well as clients.

Cross Jurisdictional Issues

• An issue in a Federal/State/Local Government model

• Inability for one auditor to trace across jurisdictions.

• Certification process deals with finance but performance audit would be a problem.

• Made worse by statutory constraints on AG passing audit results to another, other than through their Parliament first.

Communication

During the course of Audit

• See our booklets

• Rights of Auditee

• Natural Justice

• Clearance processes

Reporting to Parliament

• Media releases/lockups

• Interviews with media

• Briefing Ministers/MP’s/PAEC

• Tabling out of session

• Early warning of what is to be tabled and when

• Website now part of the publication process.

• Interviews with media

Annual Plan

Report clearance processes

Thank you

Importance of the role of Auditor-General when all else around is changing.

Fundamental Role of AG unchanged.

• Key element in the Accountability process in a healthy democracy

• Independence, competence, objective assessments about the why Government resources are applied and accounted for.

Effective audit relies on effective relationships with audited agency and Government so well as Parliament.

Audit function rarely under threat if the job is done well; adding value by the process.