3.1
The Committee reviews the expenditure, including the annual financial statements, of the six Australian Intelligence Community (AIC) agencies pursuant to section 29 of the Intelligence Services Act 2001 (IS Act). ASIO’s budget and financial statements are publically available in its Portfolio Budget Statements and ASIO’s Annual Report 2017–18. All other agencies provided a copy of their 2017–18 financial statements to the Committee.
3.2
The Committee reviewed the financial statements and took evidence from each agency during private hearings. The Committee also received a submission from the Australian National Audit Office (ANAO), outlining its audit findings for each agency over the reporting period.
3.3
The Committee examined all material provided and questioned agencies on aspects of their expenditure.
3.4
Much of the evidence received by the Committee is classified and has not been authorised for publication. Following is an unclassified overview of the Committee’s findings.
3.5
In examining the financial circumstances of each agency over the reporting period, the Committee sought evidence on each agency’s ability to meet its objectives within its budget parameters.
Budget and financial performance
3.6
The Committee requested agencies to make submissions addressing the following matters:
overall financial position of the agency;
the impact of any funding increases and budget measures;
the ongoing implications of the efficiency dividend (where applied) and other savings measures;
efficiencies and savings measures implemented within the organisation;
the status and key deliverables of significant capital expenditure projects, including any changes to the budget, scope or timeframe for each project; and
any significant changes in recurrent expenditure compared to previous years (both in total and in individual expenditure items), including the nature of and reasons for those changes.
ASIO
3.7
ASIO received revenue from government totalling $505.3 million in 2017–18, up from $445.2 million in 2016–17. The revenue comprised:
$421.8 million in operating funding ($403 million in 2016–17);
$68.6 million in Departmental Capital Budget ($28.1 million in 2016–17); and
$14.9 million in equity injection ($14.1 million in 2016–17).
3.8
For the fourth and final year, ASIO’s revenue included additional funding relating to the ‘Enhancing security intelligence capabilities to counter the Islamist terrorism threat’ measure that was announced by the Government in August 2014. This included $52.0 million in operating funding and an equity injection of $13.5 million for capital activities.
3.9
ASIO also received additional operating funding of $19.4 million, and capital funding of $1.4 million, relating to Additional Estimates measures. Two of these measures related to recommendations of the 2017 Independent Intelligence Review, specifically:
assistance with the establishment of a 24/7 capability in the Australian Cyber Security Centre (ACSC); and
a temporary secondment of nine ASIO personnel to the Australian Government Security Vetting Agency (AGSVA) to help with its remediation program for Positive Vetting security clearances.
3.10
In a measure classified as a ‘decision taken but not yet announced’, ASIO received a further $2.3 million in 2017–18. ASIO’s funding for 2017–18 also included operating funds for ‘sustainability’, which had been extended for 2018–19 only. ASIO cautioned that:
Without ongoing sustainability funding, there will be significant resourcing pressures.
3.11
While ASIO stated that it would continue to ‘identify and implement efficiencies and rigorously prioritise’ its activities, it indicated that:
… further consideration will be given during 2018-19 to the sustainability of our current operations in light of our projected [Departmental Capital Budget] (DCB) and operating budget, and our anticipated future operating environment.
3.12
According to the 2018–19 portfolio budget statements, ASIO’s total estimated expenditure in 2017–18 was $528.688 million.
3.13
ASIO recorded a surplus of $0.972 million (excluding depreciation) for 2017–18.
3.14
ASIO’s reported that its DCB remained ‘under pressure’ as it worked to ‘replace assets that provide the capability needed to operate effectively in a rapidly changing security and technological environment’. ASIO’s DCB was expected to continue to increase to $85.6 million in 2018–19, but stabilise at a lower figure of approximately $44 million from 2019–20 onwards. ASIO added that its DCB from 2018–19 ‘will not be sufficient to fund assets that are required to be replaced’.
3.15
ASIO’s ‘operationally related’ expenditure comprised 78 per cent of its total spending in 2017–18, down from 81 per cent a year earlier. Correspondingly, the proportion of non-operational expenditure increased by three percentage points to 22 per cent. ASIO attributed this increase in non-operational expenditure to:
external factors, including an eight per cent increase in supplier costs for its Corporate and Security Division and an 18 per cent increase in its Information Division supplier costs; and
the establishment of an Enterprise Transformation Office as an outcome of the review of ASIO’s technology state conducted by Mr David Thodey AO, which resulted in additional expenditure of $9.3 million during the reporting period.
ASIS
3.16
ASIS provided the Committee with a copy of its audited financial statements, together with an overview of its financial performance during 2017–18.
3.17
According to the publicly available 2018–19 portfolio budget statements, total resourcing for ASIS was an estimated $528.340 million in 2017–18, up from $464.479 million in 2016–17.
3.18
The 2017–18 budget papers included few details of the financial implications of additional funding ‘due to national security reasons’:
The Government will provide additional funding over 4 years to support the operation of the Australian Secret Intelligence Service and strengthen its capacity to meet the strategic priorities and objectives of the organisation and the Government.
3.19
However, ASIS’s total estimated expenditure in 2017–18 was much lower at $389.779 million.
3.20
In its submission, ASIS outlined a number measures it had undertaken during 2017–18 as part of a focus on ‘continuous improvement of strong financial management’, and outlined plans for the further development of its financial management framework over the next 12 months. ASIS submitted that its focus remained on ‘effective resource management and development of long-term financial strategies’ in order to help it ‘remain sustainable and able to meet operational objectives’.
3.21
ASIS provided further information to the Committee on its financial position and in relation to specific expenditure items in its classified responses to written questions.
The efficiency dividend
3.22
The Committee continues to monitor the impact of the efficiency divided and other budget measures on the AIC agencies in its annual reviews of administration and expenditure. The Committee’s ongoing concerns about the impact of the efficiency dividend on intelligence agencies have been reported to the Parliament as part of these reviews.
3.23
The efficiency dividend has been applied to the departmental expenses of Australian Public Service organisations since 1987–88. The efficiency dividend affects base departmental funding, reducing the amount available to agencies prior to the addition of any new measures. The ‘usual’ annual savings rate under the efficiency dividend has been 1.00 or 1.25 per cent, but the rate has at times been increased—to as high as 4.00 percent in 2012–13—in order to achieve greater savings. A rate of 2.50 per cent was applied in 2014–15 and maintained for the next two years. The 2016–17 Budget stated that the efficiency dividend would remain at 2.50 per cent for 2017–18, before being reduced to 2.00 per cent in 2018–19 and 1.50 per cent in 2019–20.
3.24
Since its 2008–09 review of administration and expenditure, the Committee has regularly raised concerns about the application of the efficiency dividend to intelligence agencies.
3.25
In its 2014–15 review, the Committee welcomed the Government’s decision, announced in the May 2015 Budget, to exempt ONA (and the Office of the IGIS) from the ongoing application of the efficiency dividend. This exemption followed the January 2015 Review of Australia’s Counter-Terrorism Machinery by the Department of the Prime Minister and Cabinet (PM&C), which had recommended the complete removal of the efficient dividend from these agencies.
3.26
The PM&C review had also recommended the removal of the efficiency dividend from the operational (i.e. non-administrative) activities of ASIO, ASIS, Australian Federal Police (AFP), and (in-principle) operations of the former Australian Customs and Border Protection Service.
3.27
The Committee recommended that, in line with the recommendations of the PM&C review, the efficiency dividend be removed from all ASIO, ASIS and AFP operations. In doing so, the Committee reiterated its previous concerns and noted the high and increasing organisational security requirements of AIC agencies, which reduce their scope for cost-savings at a whole-of-organisation level without impacting operational capabilities.
3.28
In 2015–16, the Committee noted that while the efficiency dividend continued to be applied to ASIO and ASIS, both organisations had been provided with additional funding over the forward years which may, in effect, offset some of the pressures on base funding. The Committee indicated that it would continue to monitor agency resourcing in future reviews.
3.29
In the current review, ASIO reported that, during 2017–18, it had returned approximately $25.4 million to the Government through the efficiency dividend and other savings measures. It noted that the continued savings measures would have a ‘significant impact’ on ASIO’s Departmental Capital Budget, its 2018–19 operating budget, and across the forward estimates.
3.30
ASIS reported that, although additional funding was intended to supplement its budget to accommodate the efficiency dividend, it falls short of completely covering the adjusted efficiency dividend. What’s more, it is unclear whether the supplementary funding will be ongoing, whereas the application of the efficiency dividend to ASIS is expected to continue.
ONA
3.31
ONA’s total appropriation in 2017–18 was $57.586 million, up 63 per cent from $35.343 million in 2016–17. This included a Departmental Capital Budget of $3.963 million and equity injections of $11.700 million.
3.32
ONA’s revenue from government increased by $9.958 million in 2017–18 due to additional funding received for the establishment of ONI.
3.33
ONA increased its operating expenditure in line with the increased revenue from Government. According to the 2018–19 portfolio budget statements, ONA’s total estimated expenditure in 2017–18 was $41.630 million.
3.34
The majority of ONA’s operating budget was spent on employees, for which an increase in expenses was driven by the increase in overall staff numbers. Total supplier expenses also increased slightly due to increased recruitment and travel expenditure, also corresponding to the increase in overall staff numbers.
3.35
ONA remained exempt from the efficiency dividend during 2017–18. However, as ONA transitions to ONI, the efficiency dividend will be applied to ONI funding from 2019–20 and to the whole of ONA funding from 2020–21.
3.36
ONA reported an operating surplus of $4.36 million for 2017–18 (excluding depreciation and amortisation, and the impact of changes in asset revaluation). The surplus was predominately driven by delays in recruitment activity.
3.37
Total capital expenditure for 2017–18 was $4.882 million, with major capital projects undertaken during the year including accommodation works and upgrades to ICT systems.
Defence Intelligence Agencies
3.38
As part of their classified submissions, the DIA each provided copies of their financial statements.
3.39
The individual budgets and expenditure outcomes for the DIAs are not publicly reported. The Defence Annual Report 2017–18 states that the total ‘departmental outputs’ related to the Strategic Policy and Intelligence program was $1,163.001 million, up from 973.489 million the previous year.
3.40
Total expenditure by AGO and DIO increased only slightly during 2017–18, with increased employee costs being offset by decreased supplier costs.
3.41
Conversely, reported total expenditure at ASD was substantially lower than the previous year. This was attributed to a delay in asset recognition that reduced the reported value of depreciation and amortisation, and was subject to a remediation exercise at the time of ASD’s submission. In supplementary evidence, ASD explained that the value of its total assets had fallen between 2016–17 and 2017–18 due to assets being wrongly classified against ASD and transferred back to the Department of Defence; its annual depreciation expense; a write-down in asset value for asset impairment; and no substantial addition to assets during the year.
3.42
ASD advised that, since becoming a separate entity in July 2018, assets identified as belonging to ASD were being transferred from the Department of Defence, with ASD undertaking a full review and physical stocktake. This exercise was expected to be complete by 30 June 2019, with ASD’s asset position expected to be clear beyond that date. Total ASD expenses for the 2018–19 financial year was estimated at $831.29 million, including $84.82 million unfunded depreciation expense.
3.43
Funding for the operations of the DIAs was not subject to the efficiency dividend in 2017–18.
Committee Comment
3.44
The Committee has been monitoring the application of the efficiency dividend on the AIC since 2010. In its report, Review of Administration and Expenditure No. 7—Australian Intelligence Agencies, published May 2010, the Committee noted the potential of the efficiency dividend to degrade the capabilities of smaller intelligence agencies and committed the Committee to ongoing observation of the matter in future administration and expenditure reviews. The Committee has consistently expressed concern and made recommendations in relation to the application of the efficiency dividend to intelligence agencies.
3.45
In its report, Review of Administration and Expenditure: No. 8—Australian Intelligence Agencies, published June 2010, the Committee noted that the potential of the efficiency dividend to negatively impact ONA and another intelligence agency, and recommended:
… that the Australian Government review the potential adverse effects of the efficiency dividend on the Australian Intelligence Community having particular regard to the Joint Committee of Public Accounts and Audit report The efficiency dividend and small agencies: Size does matter.
3.46
This recommendation was not accepted by the Australian Government.
3.47
The Committee continued to note the impact of the efficiency dividend on intelligence agencies in its next two reviews of administration and expenditure of intelligence agencies. This led to a recommendation in its combined report Review of Administration and Expenditure: No. 11 and No. 12 —Australian Intelligence Agencies, published September 2014:
… that the Australian Government review the continued application of the efficiency dividend and other savings measures to the agencies comprising the Australian Intelligence Community. Particular consideration should be given to the cumulative impact of these measures on operational capacity, including maintaining optimal staffing levels, and the ongoing ability of agencies to protect Australia’s national security.
3.48
This recommendation was informed by the Committee’s view that ‘the ongoing application of the efficiency dividend or other savings measures to the AIC places Australia’s national security at risk’. The Australian Government responded to this recommendation by noting that the 2015–16 Federal Budget included an announcement to exempt ONA and the Office of the IGIS from the efficiency dividend for four years.
3.49
In its following two reviews, the Committee welcomed the exemption of ONA and the Office of the IGIS from the application of the efficiency dividend, but noted that it continued to apply to ASIO and ASIS, although it did acknowledge that these agencies had received some additional funding during the reporting periods. The Committee also reiterated its concerns about the impact of the efficiency dividend on the AIC and noted that a Department of the Prime Minister and Cabinet review also recommended that the efficiency dividend ‘be removed from or significantly reduced’ for the ‘operation of ASIO, ASIS and the AFP’. The Committee therefore recommended:
… that, in line with the recommendations of the Department of the Prime Minister and Cabinet’s January 2015 Review of Australia’s Counter-Terrorism Machinery, the efficiency dividend be removed from all Australian Security and Intelligence Organisation, Australian Secret Intelligence Services and Australian Federal Police operations.
3.50
The Australian Government responded by noting this recommendation and highlighting a range of additional funding provided to ASIO, ASIS and the AFP via new Budget measures.
3.51
The Committee welcomed this additional funding it’s in report, Review of Administration and Expenditure: No. 15 (2015–2016)—Australian Intelligence Agencies, published June 2017. However, its most recent report, Review of Administration and Expenditure: No. 16 (2016–2017)—Australian Intelligence Agencies, published October 2018, noted that that the Committee has continued to receive evidence that the efficiency dividend is impacting intelligence agencies. Moreover, the Committee noted that the efficiency dividend will be reapplied to ONA as it transitions to ONI, (applied to ONI funding from 2019–20 and then the whole of ONI from 2020–21).
3.52
Further evidence highlighting the negative impact of the efficiency dividend on the operations of ASIO and ASIS was provided to the Committee as part of the current administration and expenditure review.
3.53
The Committee therefore remains of the view that ASIO, ASIS and ONA/ONI should be exempt. The high (and increasing) non-discretionary costs associated with operating in a secure environment make it very difficult for intelligence agencies to identify budget savings without negatively impacting operations. Moreover, ONA, ASIO and ASIS are, to varying degrees, undergoing a period of reform to ensure they remain effective into the future. The Committee strongly believes that ongoing budget certainty is required to facilitate these reform activities.
3.54
The Committee would consequently like to see these agencies exempt from the efficiency dividend or, if it continues to be applied, provided with funding measures sufficient to deliver the budget certainty required to sustain their operations and adequately respond to the changing security environment.
3.55
The Committee recommends that the Australian Government review the application of the efficiency dividend to the Australian Security Intelligence Organisation, the Australian Secret Intelligence Service and the Office of National Intelligence with a view to safeguarding their operational budgets.
Financial statement audits
3.56
The Commonwealth’s financial framework is provided for under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
3.57
ASIS, ASIO and ONA are each required to produce annual financial statements in accordance with section 42 of the PGPA Act, as supported by the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the Financial Reporting Rule).
3.58
The ANAO audits these financial statements and reports on whether the financial statements:
comply with the Australian Accounting Standards-Reduced Disclosure Requirements and the Financial Reporting Rule, and
present fairly the financial position of the entity and its financial performance and cash flows for the year then ended.
3.59
The ANAO conducts its audits in accordance with the ANAO’s Auditing Standards, which incorporate the Australian Auditing Standards, so as to ‘provide reasonable assurance as to whether the financial statements are free from material misstatement’. The ANAO explained:
Each audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entities’ preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entities’ internal control.
3.60
Under section 105D of the PGPA Act, the Minister for Finance has made determinations that allows the Accountable Authorities of ASIO and ASIS to omit certain financial information from their financial statements where it could reasonably be expected to be operationally sensitive. Due to the pervasiveness of the use of this determination, ASIS’s financial statements are ‘special purpose statements’ that are prepared in accordance with the PGPA Act and the Financial Reporting Rule.
3.61
The ANAO noted that the section 105D determinations, as applied by ASIO and ASIS, impacted certain disclosures in the financial statements, but ‘does not impact the ability of the ANAO to audit the underlying transactions of these entities’.
3.62
The ANAO summarised key elements of the governance arrangements for ASIO, ASIS and ONA that are designed to provide ‘reasonable assurance’ in the preparation of financial statements as follows:
a number of management committees that meet regularly to evaluate the entity’s direction and financial results,
an internal audit function that provides assurance on the effectiveness of internal controls, and
an audit committee that meets quarterly and has independent members.
3.63
The DIAs were not listed as prescribed entities in the PGPA Act Regulations for 2017–18, and were therefore not required to produce separate financial statements under the PGPA Act. Instead, the revenues, expenses, assets and liabilities of these agencies were included in the annual financial statements of the Department of Defence. Unaudited financial statements for each agency were, however, provided to the Committee as part of this review.
ASIS
3.64
The ANAO assessed the risks of material misstatement associated with ASIS’s 2017–18 financial statements to be ‘moderate, recognising the special circumstances applying in relation to security and logistical arrangements’. The ANAO noted that its assessment was primarily based on the size and nature of ASIS’s operations, established governance processes including an audit committee, no ‘significant’ or ‘moderate’ issues noted in prior years, and no significant changes in business operations.
3.65
The ANAO did not identify any ‘significant’ or ‘moderate’ audit issues in the course of its 2017–18 audit.
ASIO
3.66
The ANAO assessed the risks of material misstatement associated with ASIO’s financial statements as ‘moderate, recognising the special circumstances applying in relation to security and logistical arrangements’. The ANAO noted that its assessment was primarily based on the financial statements reporting requirements which ‘are not complex; there are no administered schedules, special accounts or special appropriations’. Further, ‘ASIO has an experienced and stable finance team that produces high quality financial statements and historically has been proactive in addressing any weaknesses in its accounting systems identified by the ANAO’.
3.67
The ANAO did not identify any ‘significant’ or ‘moderate’ audit issues in the course of its 2017–18 audit.
ONA
3.68
In 2017–18, the ANAO assessed the risks of material misstatement associated with ONA’s financial statements as ‘low’. The ANAO did not identify any audit issues for ONA during the year.
Defence Intelligence Agencies
3.69
As noted above, revenues, expenses, assets and liabilities of the three DIAs were included in the annual financial statements of the Department of Defence, and not separately audited by the ANAO. In relation to the audit, the ANAO advised that ‘[w]hile individual items may be included in samples selected for testing, they are not separately identified’. In its audit of the Department of Defence’s financial statements, the ANAO did not identify any ‘significant’ or ‘moderate’ audit findings specific to any of the DIAs nor the broader Strategic Policy and Intelligence Group.
Committee comment
3.70
On the basis of the evidence from the Auditor-General, the Committee is satisfied that the agencies are appropriately reporting their financial position through their financial statements. The Committee notes that no significant or moderate audit issues were identified by the ANAO during 2017–18 in relation to the agencies.
Chair
5 December 2019