QUALITY REPORTING IN THE PUBLIC SECTOR

Presentation to the
Australasian Reporting Awards Annual Seminar on Reporting,
Melbourne, June 2005

By Wayne Cameron
Auditor-General of Victoria

Quality reporting is vital in the private, public benefit and public sectors. Stakeholders have a right to expect a high-quality annual report; and organisations have an obligation to be fully accountable, transparent and forthright in their reporting. An Auditor-General has an essential role to play in the public sector accountability process, and good corporate governance is a key component of quality reporting. Legislative requirements, regulations, standards and stakeholder expectations are constantly evolving, and impact on the value of the annual report to the reader. Mr Cameron discusses these issues and provides some relevant guidance for excellence in annual reporting.

OPENING REMARKS

Good morning everyone.

First of all, thank you for your enthusiasm in attending this ARA Annual Seminar Reporting. I’m sure that you will find it an informative day.

I’m pleased to be your keynote speaker today. I hope my topic of “Quality reporting in the public sector” will be useful to those of you who are involved in preparing annual reports. Although I’m likely to draw on public sector examples I’m hopeful that those of you from other sectors will find my comments useful. There are many elements of reporting that are common across all sectors on the economy.

KNOW THE EXPECTATIONS OF YOUR AUDIENCE

Let me start by saying that no matter which type of organisation is preparing an annual report, it’s always important for that organisation to be aware of its audience – your key stakeholders. These will be shareholders, employees, consumers, creditors, suppliers and financiers; and in the public sector context - taxpayers, ratepayers, volunteers … even the humble “man-in-the-street”.

They all have an expectation and, some would say, a “right” to be presented with a high-quality report on the annual performance of the organisation they have an interest in.

THE “NEED” TO PREPARE AN ANNUAL REPORT

In many instances, these “rights” of annual report readers are enforceable – there are legislative requirements, and professional standards that come into play. Many preparers of annual reports see these requirements and standards as onerous – so much information to provide … and so prescriptive. And then there are also those challenging dates by which reports must be finalised.

Not only do organisations need to include their audited financial statements within their annual reports, there is also an expectation that the annual report will contain comprehensive information on matters such as governance, staffing, targets, achievements ( … and disappointments), performance and plans for the future.

We’re all aware that publicly-listed companies are under pressure to produce timely reports that are relevant and reliable for stakeholders to use in making resource allocation decisions. These reports are also produced to support the other major reporting objective of stewardship, as expressed in legal requirements of the Corporations Act, the Australian Stock Exchange and numerous accounting standards.

The challenge for preparers of annual reports – including the ever-important financial report - is that they are being read and analysed by an increasingly better educated, better organised and a more financially literate population, who are prepared to be proactive in seeking quality reports from listed entities.

High-quality reporting is also expected and required of government and its many agencies to meet the twin objectives of stewardship and the evaluation of the performance of an organisation. Often, there is a lot of public money at stake – in providing a diverse range of important public services - and the community expects organisations to be fully accountable for the funds entrusted to them, and for the organisations to be transparent and forthright in their reporting.

The importance of reporting in the public sector cannot be under-estimated. To illustrate this point - the revenue and expense flows of the Victorian public sector are in the magnitude of about 30 per cent of the entire state economy! Put another way - my Office is responsible for auditing around 600 public sector organisations in Victoria which, together, collect income of around $40 billion a year, and have assets of around $150 billion. Government business “is” big business.

The actions of government have such widespread impacts across the community that it is essential that all resources be used as efficiently and effectively as possible. Taxpayers and the community are entitled to full and frank disclosure on how their money has been spent.

MY ROLE IN MONITORING PUBLIC SECTOR PERFORMANCE

Quality reporting is not just to do with balance sheets, statements of financial performance or cash flow. As an Auditor-General, I actively promote the importance of accurate, timely and legally compliant financial statements, all of which are a vital part of the annual report. This is, after all, why my Office exists.

We play an important part in the public sector accountability process, particularly in enforcing the accountability process back to Parliament. Parliament appropriates funds to public sector agencies to deliver services to the community – and the expectation is that these organisations will fully account for their activities and expenditures – through such means as the annual report.

In the wider context, the Auditor-General acts as 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 the community.

The Auditor-General’s principle aim is to improve accountability and encourage economic, efficient and effective use of public resources in Victoria. I mentioned earlier that I am responsible for the audit of the financial affairs and activities of around 600 public sector organisations. Just to give you a feel for the types of organisations, they include, parliament, government departments, public bodies, business enterprises, superannuation funds, health services, universities and other educational institutions, municipal councils and water authorities.

In addition to conducting audits of the financial statements of public sector organisations, my Office also conducts regular, independent investigations and reviews of public sector agencies, and reports (to Parliament) on their financial management and administrative practices.

One aspect of my Office’s activities is the number of performance reports and special inquiries, completed each year. As Auditor-General, I have a responsibility to monitor the efficiency and effectiveness of public sector agencies in their delivery of goods and services. As such, I undertake a number of performance audits each year. These performance reports take an in-depth look at the specific activities of agencies and assess how well they have performed in achieving their key objectives.

In producing a performance report, my staff, often with the assistance of specialist contractors, must come to understand the business in question before moving to assess whether there is value-for-money in the delivery of the output. So, it’s not uncommon to see our staff consulting the annual reports of these organisations to obtain vital background information on the organisations’ operations and financial performance.

Admittedly they do it electronically via the web. As will users increasingly do so out into the future – so reports that are designed with web use in mind will be the norm in the future. The future of the printed report will, I believe, be much more limited. And as we see more and more web use, I expect that we will see increasingly more demand for more frequent reporting than annually.

Already many organisations produce half-yearly reports, and concise reports. Perhaps the way of the future is to see quarterly performance reports posted onto the web with audit assurance being more continuous throughout the year.

WHAT’S SO SPECIAL ABOUT PUBLIC SECTOR ACCOUNTABILITY?

Accountability exists in the private sector, but is different in nature to that found in the public sector. Private sector financial accountability models often center on the accountability of companies to their shareholders, mainly expressed through the requirements of corporations law.

One of the main ways of achieving financial (and performance) accountability in the private commercial world is through the provision of audited financial statements and other performance data, by management. This informs shareholders and other interested parties (such as creditors) about the performance of the private sector entity.

An entity’s profits and the strength of its balance sheet (which are reflected in the share price) along with its prospects, influence 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 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, but rather to the achievement of a diverse, 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 return, and 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 the 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.

While the accounting profession is governed by numerous standards, we in the public sector have our fair share of legislative requirements. For instance, Victorian public sector entities are often required to abide by things such as the Financial Management Act, which outlines the scope of the reporting requirements of agencies in the public sector, and supporting Financial Reporting Directions.

The overriding objective is to achieve consistency in reporting by public sector agencies and, in particular, to produce more reliable, consistent and comparable information for entities when reporting at the whole-of-government level.

CORPORATE GOVERNANCE

Let me briefly mention another issue dear to my heart – corporate governance. I’m sure you will be hearing more about this topic from other presenters today.

Corporate governance has been given a significant focus in recent times because of the impact of collapses of major entities, both in Australia and overseas. While there has been some questioning of the quality of financial reports and the associated audit practice, all too often a failure of corporate governance is at the root cause of an entity failing. Within Australia, the government has responded with CLERP 9, which, in turn, has resulted, to changes to the corporations law. In addition, the Australian Stock Exchange has developed and released a set of requirements that all publicly-listed entities are expected to follow.

Good governance principles are also required for the public sector.

Readers of public sector annual reports are entitled to be assured that management practices within organisations are as they should be. Readers should have confidence in the proper management of the financial, technological, physical and human resources entrusted to public authorities to enable them carry out their vital role of providing community services. Often, the annual report is their only means of evaluating the effectiveness of how organisations are managed, and how well they deliver their services.

THE ALL-IMPORTANT “FINANCIAL REPORT”

A word that constantly crops up in my line of work is “accountability”.

Accountability in both private and public sectors is achieved by making those responsible for governing the entity legally responsible for the reports they issue – increasingly evidenced by certification by the directors and the CEO.

The financial reports of many entities are required to be subject to scrutiny by an independent auditor. The audit opinion issued by the auditor indicates the scope of any work undertaken, whether the auditor has taken serious exception to any matter associated with the financial report and issued a qualification and, most importantly, is required to express an opinion as to whether the financial report fairly presents the financial performance and position of the entity for the reporting period.

While annual reports fulfil a vital part of the accountability process, as an auditor, I still get excited about the financial report. Yes, we’ve all come across those complex-looking pages of figures and notes and audit reports down the back part of the annual report, but for some, this is the bread-and-butter part of the annual report.

We must remember that the objective of the financial report is to provide information about the financial position, performance and cash flows of an entity that is useful to a wide range of users in making decisions about the future. Quality, comprehensive, accurate and readable financial reporting information goes a long way to making a good annual report.

SOME DEVELOPMENTS IN PUBLIC SECTOR REPORTING

The key challenge affecting financial reports in the public sector (same as for the private sector) is the application for reporting periods commencing from and after 1 January 2005 of the new Australian International Accounting Standards. This will bring some change in public sector accounting and reporting.

As (until recently) a member of the Australian Accounting Standards Board (AASB), I have also been actively engaged in revising accounting standards for each of the 3 tiers of government – National and Whole-of-Government (AAS 31), Departmental Level (AAS 29) and Local Government (AAS 27). This has involved examining issues including contributions by owners, administrative items, disclosures around appropriations and disclosures of disaggregated information.

In addition, the AASB has been developing a standard, which seeks to harmonise financial reports prepared under GAAP (Generally Accepted Accounting Practice) and GFS (General Finance Statistics).

The timetables for the development of these standards have been, unfortunately, long – but some product is expected to emerge this year – with an ED (exposure draft) on GAAP/GFS reports on the general government sector due about July, and a new standard for local government not that much further away. A new standard for departmental accounting will be further away.

Increasing attention, both nationally and internationally, is being given to triple bottom line reporting. Triple bottom line focuses on reporting and making decisions explicitly taking into consideration information on economic, environmental and social performance. As such, triple bottom line can be seen as both an internal management tool as well as an external reporting framework.

MY IMPRESSIONS OF SOME ANNUAL REPORTS

As Auditor-General, I sign-off on many sets of financial statements forming part of an entity’s annual reports. I also maintain a strong interest in the full annual reports of the organisations I am responsible for auditing. My Office has also been a regular entrant in the Australasian Reporting Awards, and we have received a number of awards over the years. I’m keen for my Office’s annual report to reflect the very best practices in content, timeliness and presentation.

Each year, I carefully review a number of the award winning annual reports to see how the standard of annual reports in Victoria, and elsewhere, is improving – or perhaps where they need improvement. I have also been in the habit of writing to any Victorian public agencies, which have achieved an ARA Gold Award, to congratulate them on their achievement. In my experience, entities that seek to achieve excellence in one part of their organisation often have a culture that supports excellence throughout the organisation. So, I do not find it hard to congratulate those whose reports reflect the very best of practice – as judged by their peers.

So today, I thought it might be of interest to you if I share my thoughts - on a few examples of good practice … and some not so good. My thoughts are based on my observations and on some discussions I have had with some members of the ARA organisation.

First – the good news:

I’d say that there has been a significant improvement in public sector reporting over recent years. One of the growth areas in the number of entrants for the ARA Awards has come from public sector organisations. This does not surprise me, as I think that more and more organisations consider the ARA criteria as a benchmark when putting their annual reports together – in addition to meeting all the legislative requirements of their respective states and sectors.

My colleagues in the ARA tell me that more and more public sector organisations are taking the time to come along to receive feedback on their reports – and, importantly, they do take on board comments aimed at improving their reports.

I’ve noticed that organisations engaged in similar activities, say municipal councils, or hospitals and health groups (or even Audit Offices), seem to notice what their industry/sector/interstate counterparts are doing with their annual reports, and their involvement in the ARA process tends to sharpen their approach to the preparation of their annual reports.

The trend to bring public sector annual reports into line with best practice has definitely improved the quality of the content – particularly in areas such as performance information and alignment with “big picture” plans and targets.

Outcomes are now key features of the better public sector annual reports – giving more meaning to performance than the outputs-focused approach.

And a telling feature of the ever-improving standard of public sector annual reports has to be the growing number that are successful in achieving ARA Awards – not only the Gold Award – but also Silver and Bronze.

However, as an auditor, I’m always on the lookout for areas for improvement. Some observations:

I find that many public sector reports fail the communication test - they are poorly structured and badly sequenced. At the outset of this presentation, I mentioned that you must know your audience – know their expectations – put yourself on their side of the annual report … as a reader. The last thing a reader needs is to struggle to find information. A logical sequencing of information is essential.

The ARA criteria provide some useful guidance to structure, and tips in making the report more accessible to the reader. Indexes, glossaries, cross-referencing, using icons and colours, and a clear/crisp design – these are all simple elements that assist the reader to access the contents and navigate around the report – and assist you, the preparers of the report, to communicate effectively with the reader.

Some annual reports appear to hide vital information. I’m the first one to say that not everything goes according to plan. For sure, there will be plenty of highlights during the year – but don’t forget to tell the reader about your lowlights – or your disappointments. The CEO should deal with these early in the reports – say in the “year in review” section. I often see these “negatives” turned into positives, by explaining what went wrong, and importantly, what the organisation is going to do about it, and how it will put things back on track. In some ways, I see this as “truth” in reporting. This can take the initiative from critics and provide readers with comfort that the organisation is up-front, transparent and accountable.

While annual reports, by their very nature, provide a retrospective look at the past year, they should also convey a sense of confidence – especially about the future. So often, reports concentrate on what happened – and that’s fair enough – but I find the better reports are forward-looking in their approach to plans, targets and measuring their performance into the future.

I mentioned the trend to a more outcome-focus approach to reporting – which is often a sign of a higher-quality report. However, I still see some organisations confusing outcomes with outputs … and strategies with objectives.

Some annual reports miss the opportunity to attract and hold the reader’s attention by omitting high-level summary information in the early pages of the report. I consider the first, say, 8 to 10 pages to be the most important (with the exception of the financial statements … of course!).

I often come across some reports in which the organisation has presented so much information as to overwhelm the reader. We must remember, that not all readers will sit down and pour over every page of the annual report – many are interested in finding out as much information as they can in a short amount of time, so summary information (such as operational and financial highlights) early in the report is essential. Err more on the side of information than narrative descriptive style.

Many reports still fail to provide comparisons and quantification in highlighted reviews, even though the information is available in the detailed figures in financial sections or operations data later in the report. To say that your organisation produced 567 widgets this year is meaningless to the reader. To say that your organisation produced 567 widgets this year – a 10 per cent increase over last year and 5 per cent above target for this year – brings the information to life. Equally, tables and charts do require comparatives with previous years – and don’t forget the all-important “future” element – tell the reader what you will be aiming for next year. The reader will be more than satisfied with this level of information.

To close off on these points, I think the important thing to remember is that good communication, good disclosure and quality accountability can be achieved by providing clear objectives, measurable outcomes and future strategies in a reader-friendly presentation.

CONCLUDING REMARKS

Each year, many public sector agencies respond to the challenge of producing an annual report that aims to meet the highest criteria set by the ARA. I’m sure that, as part of this process, many will analyse the reports of the high performers who consistently win awards. Not only does this help improve their standard of reporting, but also contributes to moving to a higher level of financial reporting.

In conclusion, it’s appropriate to acknowledge the valuable role played by the Australasian Reporting Awards in contributing to the quality of annual reporting in all sectors of the economy. Through conducting seminars on annual reporting – such as this one – and by providing feedback to entrants – the ARA is a key player providing the all-important leadership in promoting continuous improvement in annual reporting.

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Additional information on the Australasian Reporting Awards can be found at http://www.arawards.com.au