Auditor-General's Report No. 25 (2020-21) Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2020 and Auditor-General's Report No. 40 (2020-21) Interim Report on Key Financial Controls of Major Entities
Introduction
2.1
This chapter reports on the Committee’s examination of the evidence contained in Auditor-General’s Report No. 25 (2020-21) Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2020 (the CFS) and Auditor-General’s Report No. 40 (2020-21) Interim Report on Key Financial Controls of Major Entities (Interim Report). It outlines the major findings of the Australian National Audit Office (ANAO), and provides the Committee’s review and recommendations.
Summary of the CFS
2.2
In preparing the Australian Government’s Consolidated Financial Statements (Financial Statements) for the 2019-20 reporting period, the ANAO issued 232 unmodified auditors’ reports, and one modified auditors’ report as at 24 November 2020.
2.3
The CFS reported the whole-of-government financial results, which showed that Australian Government expenses were $600 billion for the 2019-20 reporting period. $500.3 billion in revenue was reported, and $99.7 billion was borrowed, which represented 16.6 per cent of total expenses. In total, the Australian Government had a net operating deficit of $99.7 billion, a $133.9 billion operating deficit, and a comprehensive result (change in net worth) of a decrease in net worth by $135.6 billion.
2.4
The ANAO determined that, at the final completion of audits, most entities’ key elements of internal control were operating effectively to provide reasonable assurance that the financial statements could be prepared free from material misstatement. Two entities received significant findings which reduced the level of confidence that could be placed on key elements of internal control and that financial statements could be prepared free from material misstatement. These entities were Aboriginal Hostels Limited (AHL) and the Australian Securities and Investments Commission (ASIC).
2.5
A total of 142 audit findings were reported to entities as a result of the CFS. These findings comprised of:
Two significant findings;
22 moderate findings; and
2.6
One significant legislative breach was reported in relation to the Northern Land Council (NLC). This legislative breach was first identified during the 2012-13 reporting period. Two non-significant legislative breaches were also identified which related to instances of non-compliance with subordinate legislation.
2.7
In conducting the audits, the ANAO includes the assessment of information about Key Audit Matters (KAM). The CFS states that the use of KAMs indicates to readers which issues the auditors determined to be of most significance. In 2019-20, the CFS reported 56 KAM across 24 entities. The majority of KAM were in reference to valuation assertions for assets and liabilities. Other KAM related to matters such as expenses, subsidies and personal benefits. Three new KAM were introduced as a result of the COVID-19 pandemic, five were updated to reflect new audit procedures arising from COVID-19 risks, and seven KAM were identified in the CFS.
2.8
Table 1.1 contains details regarding the entities which were found to have either significant and/or moderate findings for the 2019-20 reporting period.
Table 2.1: Significant and moderate findings by entity for the 2019-20 CFS
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Great Barrier Reef Marine Park Authority
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1
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-
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High Court of Australia
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2
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-
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Department of Defence
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1
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2
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Australian Signals Directorate
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1
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-
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Australian National University
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2
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-
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Department of Finance
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1
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-
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Australian Trade and Investment Commission
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1
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-
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Department of Health
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2
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-
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Department of Home Affairs
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1
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1
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Australian Nuclear Science and Technology Organisation
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-
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1
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Moorebank Intermodal Company Limited
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-
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1
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Aboriginal Hostels Limited
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1
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-
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Kakadu Tourism (GLC) Pty Ltd
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1
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-
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Northern Land Council
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-
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1
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National Disability Insurance Agency
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1
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-
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Services Australia
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2
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-
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Australian Securities Investment Commission
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1
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-
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Source: Australian National Audit Office, Auditor-General's Report No. 25 of 2020-21, Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2020, pp. 99-100.
Significant findings
2.9
Two new significant audit findings were reported in the CFS, which were in relation to AHL and ASIC.
2.10
The significant finding in relation to AHL was in reference to a number of factors involving corporate governance, human resources and procurement practices. The CFS reported that ‘key processes required by the AHL Constitution were not followed in regards to the termination of the previous Chief Executive Officer (CEO) and the appointment of a new CEO’. The ANAO further identified two other areas of concern:
A lack of appropriate controls in relation to certain procurements, including issues with conflict of interest documentation; and
The management of engaging ongoing and non-ongoing staff, particularly in relation to instances where non-ongoing staff were engaged via methods that did not appropriately alert the community where ongoing positions appeared to be required.
2.11
In response to the ANAO’s findings, AHL implemented a number of changes in order to address the findings, including:
Conducting a review to ensure there was no fraud or malicious wrongdoing evidenced in its internal controls;
Developing a comprehensive action plan, which included reviews of the AHL Constitution, the Board Charter, the Company Governance Framework, and policies regarding recruitment, delegations and procurement.
2.12
The significant finding regarding ASIC related to ‘payments to key management personnel’ which were identified by the ANAO to be outside the scope of limits set by the Remuneration Tribunal. Additionally, the ANAO found ‘significant deficiencies in the procurement process surrounding the payments made for the benefit of the Chair’.
Moderate findings
2.13
Twenty-two moderate findings were reported as part of the 2019-20 CFS. The majority of moderate findings were identified in relation to the IT control environment and compliance and quality assurance frameworks, reporting eight and six findings respectively.
Ongoing findings
2.14
A number of findings were identified to have been carrying over from previous reporting periods. Of the twenty-four significant or moderate findings, six findings had been carried over from previous reporting periods.
2.15
The ANAO stated that there were often a number of reasons behind why findings carry over into subsequent reporting periods, explaining:
Generally we find that entities try very hard to implement the recommendations that we put into our financial audit reports to them—that is, the findings. When they’ve carried over from one year to another, it is usually because the remedy that needs to be put in place is going to take longer than 12 months to implement. Sometimes, what you’ll find is that the finding might start as an A or a B finding and then be downgraded over a period of time, as the remedies are put in place by the entities.
2.16
In order to better raise attention to serious findings, the ANAO has recently adopted the policy of writing to relevant ministers where a significant finding has been identified. The ANAO explained that this policy was implemented after it identified a significant finding in relation to ASIC, which prompted the Auditor-General to permanently enact the policy in order to strengthen accountability.
2.17
The ANAO explained that, aside from writing to ministers to inform them of significant findings, ‘Other than our reporting, that’s all we can do from an audit point of view, and then it’s for the executive and the ministers to deal with the issue’.
Significant legislative breach
2.18
The CFS reported one significant legislative breach in the 2019-20 reporting period, which was found in relation to the NLC. The NLC’s purpose is to provide assistance to Aboriginal Australians in part of the Northern Territory to acquire and manage traditional lands and seas.
2.19
The legislative breach was originally identified in the 2012-13 reporting period, where the ANAO reported non-compliance with the Aboriginal Land Rights (Northern Territory) Act 1976 (ALRNT Act). The ALRNT Act requires that the NLC distribute payments of an amount equal to amounts received to, or for the benefit of, traditional owners of the land within a six-month time frame after the funds are received in the royalty trust account managed by the NLC.
2.20
As in previous reporting periods, the ANAO conducted sample testing during the 2019-20 reporting period and found case where non-compliance had occurred in relation to the distribution of funds within the legislated timeframe. The report details that the NLC initiated a royalty reform project in 2016-17 in order to reduce non-compliance and reduce any outstanding balances in the royalty trust account, which was largely completed during the 2019-20 reporting period. Despite these changes, the report stated:
NLC management advised that since March 2020, the Royalty Unit formally implemented reporting processes to expedite distribution to Traditional Owners however testing performed by the ANAO subsequent to this date continued to identify non-compliance. The ANAO will review these and any new processes implemented as part of the 2020-21 audit.
2.21
The CFS also stated that the NLC had advised the ANAO in August 2020 that a legal process to ensure unallocated funds were transferred appropriately had been commenced and was anticipated to be complete by June 2021, but that a formal plan had not yet been determined. NLC management later notified the ANAO that the aforementioned legal process was in progress ‘to see direction from the court where the recipients of unallocated funds could not be identified’.
2.22
In a further update, the ANAO informed the Committee that the NLC had since initiated a number of remedial activities to address the legislative breach, including:
The receipt of an independent business case report in relation to creating a revised Royalty Unit, named the Benefits Distribution Unit;
The recruitment of two key positions and additional recruitment after budget confirmation in July 2021; and
Additional strategies put in place by management, to be conducted throughout October to December 2021.
2.23
When asked about the significant breach, the ANAO agreed with the proposition that the legislative breach was not considered to be an issue of intentional fraud, but of the ‘timing of payments’. The Auditor-General further confirmed that he had written to the responsible Minister and that he would continue to monitor developments in the next reporting period.
Summary of the Interim Report
2.24
At the interim phase of the 2020-21 Consolidated Financial Statements audits, the ANAO issued the Interim Report, which consists of the examination of twenty-five entities, including all of the departments of state and a selection of Australian government entities.
2.25
Of these twenty-five entities, twenty were considered to have key elements of internal control that were operating effectively, while five entities were found to be operating effectively to support the preparation of financial statements that are free from material misstatement.
2.26
A total of sixty audit findings were reported at the interim phase of the financial audits, including:
Nine moderate findings; and
Fifty-one minor findings.
2.27
The Interim Report notes that these findings represent ‘an overall decrease in the number of findings, but an increase in moderate findings, compared to the 2019-20 interim audit results’. No significant findings were identified in the Interim Report.
2.28
Fifty-three per cent of all findings, and fifty-six per cent of moderate findings, were reported to be in relation to the management of IT security, and principally regarding privileged user access controls. The Interim Report states that ‘The continued level of findings indicates that the IT control environment warrants further attention by entity management’.
2.29
The Interim Report also examined two key topics of note: audit committee reporting obligations for Commonwealth entities, and safeguarding financial information from cyber threats. These matters will be further discussed in Chapter 3.
Moderate findings
2.30
Nine moderate findings were identified by the ANAO in conducting the interim audits of Commonwealth entities. The moderate findings reported were identified in the following categories:
IT control environment: five moderate findings reported;
Compliance and quality assurance: two moderate findings reported;
Accounting and control of non-financial assets: one moderate finding reported; and
Purchases and payables management: one moderate finding reported.
2.31
Further, five moderate findings were unresolved from previous reporting periods.
2.32
Table 2.2 provides a list of entities that were found to have moderate findings, including unresolved findings from previous reporting periods.
Table 2.2: Findings by entity in Interim Report 2020-21 as at 30 April 2021
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Department of Defence
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1
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1
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Department of Health
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-
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2
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Department of Social Services
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2
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-
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Services Australia
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-
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1
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National Disability Insurance Scheme Launch Transition Agency
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1
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1
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Source: Australian National Audit Office, Auditor-General's Report No. 40 (2020-21) Interim Report on Key Financial Controls of Major Entities, p. 51.
Committee comment
2.33
The Committee notes the results provided by the ANAO’s 2019-20 CFS, and is pleased to observe that the number of significant findings has decreased in comparison to previous reporting periods. These results were achieved in a period of significant uncertainty and upheaval during the COVID-19 pandemic. This demonstrates to the Committee that the governance of Commonwealth entities appears adequate to enable entities to meet unexpected challenges and able to meet future demands with skill.
2.34
The ANAO’s recently adopted practice of writing to Ministers in the event of the discovery of a significant finding is a positive development. The Committee approves of this method of the Auditor-General’s drawing attention to significant findings to the relevant portfolios, and anticipates that significant findings may be faster to resolve as a result. Further, the Committee observes that this practice has been only recently been implemented by the Auditor-General, and is not a requirement by law for significant breaches. The Committee considers that this practice may be suited to being formally required in order to ensure future significant breaches are given adequate attention. This practice should be implemented in the ANAO’s enabling legislation.
2.35
The Committee recommends that the Department of Prime Minister and Cabinet, in consultation with the Australian National Audit Office, amend the Auditor-General Act 1997 to implement a requirement for the Auditor-General to inform Ministers in the event where either a significant finding or a significant legislative breach is identified during the course of the financial audits.
2.36
In regards to the significant legislative breach which has remained unresolved since the 2012-13 reporting period, the Committee has noted the evidence from the ANAO which states that the NLC has taken a number of remedial steps in order to rectify the breach. Given the nature of the legislative breach – which the Committee has been informed by the ANAO is primarily administrative in nature – and the actions being undertaken to address the underlying issues, the Committee is confident that the breach will be addressed in the near future. Nonetheless, the Committee requests that it be provided with an updated from the NLC in regards to its progress in addressing the legislative breach, and also from the ANAO in its view on whether progress is being made.
2.37
More broadly, the Committee recognises that the fundamental issue in this matter is the timeframe stipulated by the legislation in the enabling Act, which does not provide for a situation where traditional owners cannot be appropriately identified. This was reinforced by the Auditor-General, who considered the issue primarily an administrative concern. While the intent of the legislation – to ensure that traditional owners are provided with royalties as they are entitled – may work in most situations, the lack of flexibility in its drafting is problematic. The Committee considers that there may be value in considering whether an amendment to the legislation to accommodate unusual circumstances.
2.38
The Committee will monitor the situation through these responses and over impending CFS reports and eagerly anticipates seeing the resolution of this breach.
2.39
The Committee recommends that the following updates be provided to the Committee within six (6) months of the tabling of this report:
An update from the Northern Land Council providing an update in relation to its progress in addressing the significant legislative breach identified by the Australian National Audit Office; and
An update from the Australian National Audit Office informing the Committee on whether sufficient progress has been made by the Northern Land Council in addressing this breach.
2.40
The Committee recommends that the Department of Prime Minister and Cabinet investigate potential amendment to the Aboriginal Land Rights (Northern Territory) Act 1976 to accommodate for situations where payments cannot be distributed to traditional owners within the timeframe nominated due to the absence of identifiable traditional owners.