| Parliamentary Joint Committee on Public Accounts and Audit
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Chapter 5 Jurisdictional issues – ‘following the dollar’
Under the final term of reference for this inquiry, the
Auditor-General’s authority to ‘follow the money trail’ was examined.
Currently, the Auditor-General Act 1997 does not provide the
Auditor‑General with the capacity to directly examine the financial and
performance outcomes from Commonwealth investments in the private sector and
Commonwealth grants made to State and Local governments. The lack of such
capacity imposes limits on the Auditor-General in ensuring that
agencies/entities are accountable in relation to the Commonwealth funding they
The Committee received evidence indicating broad support for the
enhancement of the Auditor-General’s powers to enable greater scrutiny in this
area. However, the extent of those powers and the most effective form of
implementation is problematic, potentially raising constitutional issues.
A number of suggestions were put to the Committee that would increase
the Auditor-General’s access and enable a cooperative approach between the
Commonwealth and States/Territories to audit these funds. These suggestions
are considered below.
Cross-jurisdictional arrangements – grants to States/Territories
The Commonwealth provides three types of payments to the states:
- National Partnership
payments to support the delivery of specified projects, facilitate reforms or
reward jurisdictions that deliver on nationally significant reforms;
- general revenue
assistance which includes GST payments; and
- National Specific
Purpose Payments (SPPs) which are related to key service delivery sectors.
In 2010-11, the Commonwealth will make payments for five National SPPs
in the areas of healthcare, schools, skills and workforce development,
disability services, and affordable housing.
Most SPPs provided to the States and Territories by the Commonwealth Government
are conditional and tied to federal policy objectives.
SPPs are either made ‘to’ the State/Territory and supplement State funding or
‘through’ the State/Territory and passed on to other agencies for their use.
The Committee was told that historically a lack of accountability has been
a problem with Commonwealth grants to States and Territories. The Institute of
Public Administration Australia (IPAA) identified the issue in its written
submission to the inquiry:
There is a glaring gap in the accountability of Commonwealth
grants to states – especially where specified results or performance indicators
are agreed. The Commonwealth Auditor-General does not audit these programs
against the agreed objectives, nor do state Auditors-General. States may report
back on their claimed performance but the Commonwealth has no real check as to
their validity and reliability.
According to the ANAO, the difficulty has been compounded by the
implementation of the Intergovernmental Agreement on Federal Financial
Relations by the Council of Australian Governments (COAG) which has reduced
Commonwealth prescriptions on service delivery by the States thereby increasing
flexibility of service delivery.
The Auditor-General told the Committee that under these arrangements
assessment of performance would become more significant to ensure
accountability and transparency:
It puts even greater emphasis on the performance information
that the states themselves generate to show their performance with the
Commonwealth funding and some of their own funding. So I think going forward
under these new regimes, performance information is going to be even more important
than ever. 
To enhance accountability arrangements, the ANAO suggested four options.
These options are set out as follows:
the authority for the Auditor-General to conduct an audit to assess the
performance of bodies that receive Commonwealth funding in circumstances where
there is a corresponding or reciprocal responsibility to deliver specified
outcomes in accordance with agreed arrangements...
as a matter of government policy, legislation relating to Australian Government
Special Purpose Payments (SPP) and agreements that are put in place to govern
the provision of payments for specified purposes to include a provision that
provides the Auditor-General with the authority to conduct an audit to assess
the performance of bodies that receive Commonwealth funding where there is a
corresponding or reciprocal responsibility to deliver specified outcomes in
accordance with agreed arrangements...
as a matter of government policy, SPP legislation and agreements to provide the
Auditor-General with access to information and records relating to the use to
which the funds in question have been put by the parties to the legislation or
- Explore opportunities and any necessary legislative changes which would assist in
further cooperation between the Auditor‑General and State and Territory
Auditors-General. Such arrangements would be designed to assist in the
Commonwealth and State and Territory Auditors-General working in a
complementary manner and may provide for the authority for the Auditor-General
to share information obtained during the course of audits with State and
In the case of options a) and b) above, which the Auditor-General
submits have the ‘greatest potential impact’, any audit undertaken
would be in the context of the purposes for which the funds are provided and
could be exercised only in circumstances where the performance of relevant
bodies is, in the Auditor-General’s opinion, significant in the context of an
audit of a Commonwealth entity.
Providing the Auditor-General with the authority to conduct audits of
the nature and in the manner outlined in options a) and b) above did not elicit
a great deal of support from witnesses.
For example, in its written submission to the inquiry, the Australasian
Council of Auditors-General (ACAG) cautioned that the Auditor‑General’s
mandate should not be extended into States and Territories as such a move would
raise constitutional issues. ACAG did not elaborate
on the constitutional issues involved but asserted that such audits should
remain the responsibility of State and Territory Auditors-General in the
- where the grant is
made to a State or Territory Government and that State or Territory Government is
required to acquit the grant in some manner to the Commonwealth, ACAG
considers that any audit of that acquittal should remain the responsibility of
the relevant State or Territory Auditor-General; and
- where the grant is
made to a State or Territory Government but no acquittal is required,
any local audit activity should again remain the responsibility of the relevant
State or Territory Auditor-General.
Instead, ACAG suggested to the Committee that the federal legislation be
examined and steps taken to enhance the capacity for cooperation between
Auditors-General across Australia and thus facilitate the conduct of joint audits
A number of other witnesses also supported the concept of developing a
framework for the conduct of joint audits by Commonwealth and State/Territory
audit offices (the ANAO refer to this concept in option (d) above). For
example, the Commonwealth Ombudsman suggested that the Ombudsman Act 1976,
which sets out arrangements to allow cooperation between Commonwealth and State
and Territory Ombudsmen, could be used as a model to develop relevant
legislation to facilitate cooperation between the Auditors-General.
The potential for constitutional issues were options (a) or (b) to be adopted
was also raised by Mr Andrew Podger AO of the IPAA at the hearing on
22 June 2009. In its written
submission the IPAA also supported a joint‑audit model as follows:
We would support the notion of developing a regime of joint
audits – joint teams of Audit staff from the Commonwealth and
States/Territories (supplemented by private sector audit experts if necessary).
These teams could review program performance, including reports and systems
used by the COAG Reform Council, and report to both or all parliaments. It
would be hoped that a joint report of findings could be agreed, although
provision will have to be made for the event of disagreements or different
The Committee sought clarification on the current impediments to the
Commonwealth and States and Territories’ audit offices undertaking joint
audits. ACAG explained that secrecy provisions in the Auditor-General Act
1997 are the chief impediment:
At the moment under the legislation – both the Commonwealth
legislation and state based legislation – it would require each respective
auditor-general to decide to do an audit and then to undertake that audit
independently. Certainly our understanding of the Commonwealth legislation
provides some restrictions around the sharing of information that might be
obtained within a Commonwealth ANAO audit and the limitations on being able to
share that information with us at the state level and vice versa.
The Auditor-General also referred to the difficulty of information
sharing across the offices of Auditors-General as follows:
...it is generally the case that each audit act requires the
information to be kept confidentially. And so it is very difficult, for
instance, for my office to share information that is not in the public arena
with my state colleagues. That is one existing constraint.
Although Mr Poole described the limits on information sharing as the
‘nub of the problem’, operational difficulties
such as differing priorities was also identified as an impediment.
ACAG told the Committee that each jurisdiction is responsible for reporting to
its own Parliament on that Parliament’s priorities. This led to logistical and
timing difficulties as each audit office pursued its own agenda and it became difficult
to coordinate a reporting deadline.
By way of example, the Auditor-General cited an audit into the Building Better
Cities Program, a program aimed at improving Australian cities implemented by
the Commonwealth and States/Territories between 1991 and 1996.
The Auditor-General told the Committee:
Because the two [offices] were working at different
priorities, the timing got out of sync. We were not in control of the states’
work and the states were not in control of our work, and so it became rather
challenging to deliver.
Rather than providing the Auditor-General with the authority to conduct
performance audits (options (a) and (b)) or exploring legislative changes to
facilitate cooperation between the Commonwealth and State and Territory Auditors-General
(option (d)), the third option (option (c)) outlined by the ANAO above,
suggests providing the Auditor-General with access to information and records
relating to the use to which the funds in question have been put.
The Auditor-General advised the Committee that the Department of Finance
and Deregulation has encouraged States and Territories to include standard
access clauses in contracts, allowing the Auditor-General access to records and
According to Mr McPhee, the Auditor-General’s access to other party
information was initially raised when outsourcing became popular. At that
time, the ANAO promoted the idea that Departments should include ‘standard
access clauses’ in contracts so that the Auditor-General would have access to
records and information held by contractors.
The Auditor-General referred to the audit into the road grants program,
AusLink National Network, in 2008-09 as an example of the way
in which legislative provisions that allow Australian Public Service employees
or persons nominated by the Commonwealth to inspect work on projects have
facilitated cooperation between the Commonwealth and States/Territories.
The Committee also notes that the Building the Education Revolution
(BER) program, part of which has recently been audited by the ANAO, was set up
under a National Partnership agreement and has bilateral agreements in place
which recognise that reasonable access should be provided to the
Auditor-General (for further discussion see paragraph 5.35 below).
The Auditor-General describes the inclusion of these provisions in
agreements that allow the Auditor-General access to premises and records as ‘a
very positive development and a positive evolution’.
However, in both oral and written evidence to the inquiry, the ANAO emphasised
that even though the inclusion of these clauses is increasingly common it is
This renders the process unreliable: inclusion is determined on a case
by case basis, depends on the government of the day and varies from agreement
to agreement. As the Auditor-General stated:
The difficulty is that it is not necessarily consistent. The
clauses can all be different and cannot be relied on, because they may depend
on what departments are proposing to their ministers.
The Committee firmly believes that, in the first instance, there should
be no impediment to the Auditor-General’s access to information and records
relating to how recipients of Commonwealth funding have made use of such funds.
Nor should there be any impediment to ANAO officers inspecting project work.
The Committee therefore supports the proposal that government policy should
require SPP legislation and agreements to provide the Auditor-General with
access to information and records related to the funds in question.
That all funding agreements between the Commonwealth and
other levels of Government include standard clauses providing the Auditor‑General
with access to all information and records, and a capacity to inspect work on
all projects, relating to the use of Commonwealth funds under those
That said, the Committee is aware that strengthening the Auditor‑General’s
authority to access information and records does not fully address the limits on
the Parliament’s potential to investigate whether projects are providing ‘value
for money’ for the Commonwealth and hence the Australian taxpayer.
The Auditor-General confirmed that under existing legislation he can
only assess the Commonwealth’s administration of the arrangements and not the
use to which the funds have been put:
At the moment, that is beyond what we are able to do under
our legislation. If there is an issue, we tend to say, ‘How could the
Commonwealth have better managed that?’ rather than ‘This particular
jurisdiction hasn’t done a good job.’
In providing the Auditor-General access to information related to
Commonwealth funding, as set out in Recommendation 10 above, the Committee
notes the Auditor-General will consistently have access to performance
information, however, significantly, the integrity of that information remains unchecked.
As referred to above, the Building the Education Revolution (BER)
program serves as an example where formal access arrangements facilitated a
recent audit , however, the BER audit
also serves as a practical example of the limitations of the Auditor-General’s
That is, the objective of the BER audit was to examine the
effectiveness of the Department of Education, Employment and Workplace
Relations’ (DEEWR’s) establishment of the P21 facet of the program. The ANAO
submit that because the Auditor-General’s mandate did not allow any assessment
of the performance of Education Authorities in their jurisdictions, an examination
of the individual BER P21 projects fell outside the scope of the audit.
Despite bilateral agreements the ANAO was therefore unable to meet expectations
that the audit would have examined the delivery of individual projects.
The Auditor-General argues that the implementation of options (a) or (b)
discussed above (see paragraph 5.11) would have allowed the Auditor‑General
to more successfully ‘follow the dollar’:
... the ANAO’s mandate did not allow an assessment to be made
of the performance of Education Authorities in managing the delivery of
individual projects, including tender processes, in their respective
jurisdictions. An extension of our mandate along the lines outlined in Options
(a) and (b) ... would have allowed the scope of audit to include such an
The Committee acknowledges the range of views provided to the inquiry.
On one hand, it has been suggested that the Auditor-General should have
unfettered authority to assess the performance of bodies that receive funding
provided by the Commonwealth to States/Territories. On the other, it has been
argued that this type of funding can already be adequately tracked and
accounted for using the mechanisms provided by the existence of the
The Committee notes that the COAG Intergovernmental Agreement on Federal
Financial Relations states that the intent of the parties to the Agreement is
to improve the well-being of all Australians through improvements in the
‘quality, efficiency and effectiveness of government service delivery’ by
reducing prescriptions on State and Territory service delivery.
However, the Committee also notes that the same intent is to be delivered by
‘enhancing accountability to the public for the outcomes achieved or outputs
delivered under National Agreements or National Partnerships’.
The Committee recognises that increasingly it will become important to
establish that Commonwealth funding for programs and projects are achieving the
intended results, particularly in circumstances where funding is significant.
However, the Committee also believes that while the evidence suggests that
there are no constitutional constraints on expanding the Auditor-General’s
powers in this way these issues have not
been well articulated in evidence. Some caution therefore needs to be
exercised particularly in light of the following advice provided by the Australian
...in general, we see scope from a constitutional perspective
for the Auditor-General to be given a greater role in financial statements and
performance audit activity of non-Commonwealth bodies...However, we emphasise
that our comments are general in nature. Development of a proposal to confer
[increased audit authority in relation to financial assistance to States and
Territories] on the Auditor-General may give rise to the need to further
consider particular constitutional issues.
Additionally, and perhaps more significantly, the Committee notes and
respects the role of State Parliaments and State Auditors-General in
scrutinising the activities of State Government agencies.
For these reasons, while the Committee is not prepared to recommend that
the Auditor-General be provided with the absolute authority to conduct
cross-jurisdictional audits to assess the performance of bodies that receive
Commonwealth funding, the Committee does consider that in addition to the access
provided for in Recommendation 10 that the Auditor-General should, in certain
circumstances, have the power to directly assess the performance of bodies
receiving Commonwealth funding.
However, the Committee also acknowledges that constraints need to be in
place to moderate this power. In the Committee’s view it is appropriate that
the responsibility for moderating this power rest with a Minister or the Joint
Committee of Public Accounts and Audit on behalf of the Parliament.
Recommendation 11 therefore reflects the Committee’s position.
Consistent with the ANAO’s submission, any audit undertaken would be in
the context of the purposes for which the funds are provided.
That the Act be amended as necessary so that the
Auditor-General may conduct a performance audit to directly assess the
performance of bodies that receive Commonwealth funding in circumstances
where there is a corresponding or reciprocal responsibility to deliver
specified outcomes in accordance with agreed arrangements if a Minister or
the Joint Committee of Public Accounts and Audit requests the audit.
The Auditor-General may ask a Minister or the Joint
Committee of Public Accounts and Audit to make such a request.
The Committee notes the comments of the Auditor-General that inherent in
the approach guiding this recommendation is a risk that the level of audit activity
may be less than ideal:
I think we were saying looking
forward 10 years is it a provision that would be useful, particularly with the
way the COAG arrangements are going, to allow the office to audit performance
of recipients of grants, the states and other parties. I think...was there a
need for a constraint of some sort to say, ‘You can only do this if the
committee asked you to,’ or something like that. I then used the analogy of the
GBEs to say that has not really resulted in much activity...
However, the Committee reiterates that the Auditor-General will have the
capacity to ask the JCPAA to request such an audit.
With regard to resourcing implications, the Committee expressed concern about
expanding the Auditor-General’s power to conduct audits of bodies that receive
Commonwealth funding. The ANAO is confident that there would be no overall
increase in the number of performance audits and that, providing the
performance audit program remains adequately resourced, there would be no call
for budget supplementation. Asked to elaborate on
this statement, the Auditor-General told the Committee:
We are conscious that resources are finite. I think that,
within a program of 50 performance audits a year, if we did decide to look at a
particular audit in a state jurisdiction that would substitute for another
audit that we would have ordinarily done. So within the basket of 50
performance audits we would program some of these.
Commonwealth jurisdiction – auditing related entities/contractors
The Committee heard that the growth in outsourcing by governments has
increased the use of external parties, including contractors, to deliver
government programs and services. Under current legislation, the
Auditor-General is unable to directly assess the performance of these external
parties and ‘follow the dollar’.
Oral and written evidence to the inquiry provided a general consensus
that the Auditor-General should have the power to examine the expenditure of
public funds when government enters into commercial arrangements with private
entities for the provision of services. Reiterating the view held by a number
of witnesses, the ACAG told the Committee:
This is necessary to sustain the ability of the
Auditor-General to carry out audits which examine whether the operations or
activities of the whole or any part of the Commonwealth public sector are being
performed effectively, economically and efficiently and in compliance with all
The Committee expressed some concern that, if the Auditor-General were
provided with the power to audit contractors, an agency’s obligation to manage
contracts appropriately could diminish. The Auditor-General assured the
Committee that this was not the case and that contractual arrangements have
been strengthened over time.
Using the Defence Materiel Organisation (DMO) as an example, the
Auditor-General explained that an agency’s success depends on the contractor
meeting its performance standards. If the contractor fails in its obligations,
the agency’s performance assessment is affected:
We can be critical of DMO and its performance. They in turn
would say, ‘But we are relying on the contractor to meet their performance
standards under the contract as well. If they do not do that, you should be
saying a bit more about the contractor’s performance.’
Of further concern to the Committee is the possibility that the increasing
use of contractors could undermine Ministerial accountability and Parliamentary
oversight. As referred to in the AGAG submission, the Administrative Review
Council addressed this issue in its Report No. 42, The Contracting Out of
Government Services (1998). The Council found that contracting out
services ‘should not result in a loss or diminution of government
accountability’ provided the Auditor-General had the power to conduct audits on
the contractor’s performance and had access to all relevant information.
Similarly, a report prepared for the United Kingdom Treasury in 2001, Holding
to Account: The Review of Audit and Accountability for Central Government,
recommended that the UK Auditor-General should have statutory access to a range
of government grant recipients, including contractors.
The Committee notes the evidence from the Auditor-General that there
have been improvements in contractual arrangements, in particular the making of
payments between public sector agencies and contractors.
However, the Committee notes further comments from the Auditor‑General which
suggests that while agencies are ‘getting better’,
contracting arrangements can still be problematic:
The rhetoric is very much around the Public Service and
contractors working in partnership to deliver a particular project or a
particular outcome. Contractual arrangements support that. When there are
circumstances where the contractor does not deliver, it is a serious issue for
the department in the first place.
In its written submission to the inquiry the ANAO indicated that
legislation in both Western Australia and Tasmania grants the Auditors‑General
the authority to conduct audits of certain entities (referred to as ‘related
entities’). However, the ANAO submits that ‘related entities’ in this
legislation does not include contractors.
The Committee has a long history of reviewing audits of Defence
acquisition projects. The Committee is therefore keenly aware of the
significance of contractors meeting their performance obligations so that
agencies are able to deliver public sector programs and projects on time and on
The Committee also notes Dr Stephen Gumley AO, CEO of the DMO’s
suggestion (see submission 6) that the Auditor-General be provided with greater
authority to ‘examine the financial and performance outcomes associated with
expenditure of Commonwealth funds, including company audits’.
Given the increasing use of contractors as an integral element of government
service delivery, the Committee considers that it is appropriate that the
Auditor-General have the power to scrutinise the use of Commonwealth funds by
external entities including contractors.
Consistent with the ANAO’s primary submission,
these types of audits of external entities/contractors should only be
undertaken where the entity’s/contractor’s performance is, in the
Auditor-General’s opinion, significant in the context of an audit of a
Commonwealth entity. Additionally, the scope of these audits would be
restricted to the work undertaken under contract to the Commonwealth.
Again, the Committee notes that no resourcing implications arise as a
result of the Auditor-General conducting performance audits of entities
including contractors involved in the delivery of government programs and projects:
...it is anticipated that any additional audit coverage would
be accommodated within existing performance audit resources. On this basis,
budget supplementation would not be required.
That the Act be amended so that the functions performed by
entities including private contractors on behalf of the Commonwealth in the
delivery of government programs can be subject to direct audit by the
The Committee recognises that the expanded power to undertake
performance audits of related entities, including contractors, by the
Auditor-General requires enhanced accountability arrangements to be put in
place. To that end the Committee recommends that the Auditor‑General be
required to publicly disclose the reasons behind any decision to audit a
That the Act be amended to ensure that when a decision is
made by the Auditor-General to conduct an audit of a non-Commonwealth body,
the reasons for that decision should be disclosed in the publication of the
Other Commonwealth activities
In October 2008, in response to worsening global financial conditions,
the Australian Government announced a Government guarantee of the deposits and
wholesale funding of Australian banks and other deposit‑taking
institutions. In their written
submissions to the inquiry, both the ACAG and the ANAO suggested that
consideration should be given to providing the Auditor-General with the
authority to audit a body’s performance in meeting the terms and conditions of
such investments and support.
The Committee asked the Auditor-General how the Commonwealth currently
monitors compliance with such arrangements. The Auditor‑General told the
Committee that the Commonwealth relies on its prudential arrangements and the
Australian Prudential Regulation Authority (APRA) to ensure compliance.
On further questioning, the Auditor-General conceded that, if asked to, the
ANAO had some capacity to audit these areas:
If, however, a committee was to say, ‘We are concerned about
a regulatory regime relating to the giving of guarantees on deposits,’ or
whatever, then it would be open for us to have a look at that and the
effectiveness of the regime.
The Committee is satisfied with these arrangements and on that basis
makes no specific recommendation in this regard.
The Committee acknowledges what the IPAA describes as the ‘glaring gap
in accountability of Commonwealth grants to states [and territories]’.
The Committee is therefore supportive of the need for changes to the Auditor-General
Act 1997 to enable the Auditor-General to access information and records
relating to the use of Commonwealth funds under National Partnership payments
and SPPs and auditing of that information under certain circumstances.
The Committee also recognises that there is an increasing use of contractors
to implement government programs and services. While the Committee
acknowledges that this practice has benefits for service delivery, the
Committee is concerned it has the potential to undermine Ministerial
responsibility and Parliamentary oversight. The Committee wants to see more
accountability in this area and accordingly wants the Auditor-General to have
the power to audit external entities including contractors delivering
government programs and services.
The Committee considers it imperative that the Auditor-General be
provided with the statutory authority to address these issues, enabling the
Auditor-General to more readily ‘follow the dollar’ and ensure that
Commonwealth funding is fully accounted for and the Commonwealth is receiving
value for money.