Auditor-General Report No. 8 2020–21
Introduction
4.1
The Commonwealth entity included in the audit was the Australian Electoral Commission (AEC). The objective of the audit was to examine the effectiveness of the AEC’s management of the financial disclosure requirements under Part XX of the Commonwealth Electoral Act 1918 (the Electoral Act).
Provides background information on the financial disclosure scheme, the audit report’s findings and the AEC’s response;
Discusses issues of disclosure accuracy, completeness and timeliness;
Discusses the AEC’s approach to risk assessment and compliance; and
Considers the disagreement between the AEC and ANAO with respect to enforcement action.
Chapter overview
4.3
The Committee’s inquiry into this report highlighted a disconnect between the views of the ANAO and the audited entity, the AEC, on a number of core issues. This included disagreements in relation to the AEC’s role in enforcing breaches of the Electoral Act, the ANAO’s use of data and the impact of recent legislative changes on the accuracy of this information, and the adequacy of risk assessment practices.
4.4
This chapter will outline that the Committee believes the ANAO could look to improve consultation with audited entities and pay greater attention to their interpretation of their role and functions, particularly for entities involved in niche areas of regulation.
Background
4.5
The financial disclosure scheme was introduced in 1983 with the aim of increasing the transparency of elections and informing the public about the financial dealings of political parties, candidates and other groups involved in the electoral process.
4.6
The scheme requires entities (parties, candidates, donors, and others) that receive funding, provide funding, or incur electoral expenditure to lodge disclosure returns with the AEC. The intention of the scheme is that such disclosures will permit voters to make more informed judgements by providing a clearer picture of which entitles fund political groups and how much money they give.
4.7
The Electoral Act gives the AEC enforcement powers over the financial disclosure scheme, including the power to undertake compliance reviews and investigations to ensure entitles are meeting their legislated requirements. Following amendments made to the Electoral Act in 2018, the Act provides for both civil and criminal penalties for non-compliance with the scheme’s requirements.
Audit findings
4.8
The audit report found that the AEC’s management of financial disclosures required by the Electoral Act is ‘partially effective’ and that its administration of the financial disclosure scheme is ‘limited in its effectiveness’. The report said that:
while the AEC receives almost all the financial disclosure returns it seeks, more than 20 per cent of annual returns and 17 per cent of election returns are lodged late;
the AEC does not make effective use of data sources to cross-check return information and to identify entities that failed to lodge a return at all (that is, mistaken nil-returns);
there is insufficient evidence that returns that are provided are accurate and complete analysis of returns that are made is ‘limited’; and
risk management is not carried out in accordance with the AEC’s risk management framework.
4.9
The ANAO also identified issues with the AEC’s compliance monitoring and enforcement, and found that ‘the AEC is not well placed to provide assurance that disclosure returns are accurate and complete’.
4.10
The ANAO pointed to four reasons for this conclusion:
the AEC has not implemented the recommendations of past reviews, or absorbed information from other regulatory bodies with applicable expertise;
the AEC’s risk-based compliance framework is limited and compliance is under-resourced;
the AEC’s compliance activities are not timely or effective, and are sometimes incomplete; and
the AEC ‘does not appropriately act on identified non-compliance’.
Entity response and audit conduct
4.11
The AEC agreed to two ANAO recommendations, agreed with qualification to four recommendations, and disagreed with one. The AEC did not agree to Recommendation 7 of the audit report, which argued that it should implement ‘a graduated approach to addressing non-compliance, including by making better use of its investigatory powers’, and by ‘seeking to have prosecutions undertaken … or civil penalties applied by the courts where serious or repeat noncompliance has been identified’.
4.12
Though the AEC’s primary disagreement was with the ANAO’s recommendation on enforcement, its submission also expressed its reservations with the ANAO’s findings more generally:
The audit concluded that the AEC’s management of the financial disclosure scheme was partially effective. While the AEC welcomes all forms of scrutiny in this highly complex area, it does not agree with the conclusion and considers that the report demonstrates a misunderstanding by the ANAO of the Electoral Act which the AEC administers.
4.13
The AEC argued that the legislative intent of the scheme is to encourage ‘transparency through disclosure’, and that ‘the AEC has consistently maintained this approach since [the scheme’s creation in 1983], and the AEC’s application of the intent has not been corrected by Parliament and has been largely uncontested by stakeholders’.
… the purpose of the penalties in Part XX is to encourage transparency by deterring non-compliance and, where necessary, penalising intentional non-compliance … it is also not clear what would be gained by pursuing a civil penalty for minor non-compliance, for example against a person or entity who lodged a return late, or who made an amendment to correct their return on realising (or being informed by the AEC) that there was an error in the original return.
4.15
The Electoral Commissioner, Mr Tom Rogers, elaborated for the Committee:
The conclusion drawn in the ANAO report into the administration of the scheme runs counter to the extent of disclosure achieved by the AEC … the AEC has not detected any systemic issues of intentional or large-scale non‑compliance with the existing legislation. The AEC’s enforcement and prosecution regime continues to reflect the legislative intent of Part XX of the Commonwealth Electoral Act: transparency through disclosure. We have consistently upheld the purpose to encourage transparency and deter noncompliance by adopting an educative approach.
4.16
Further, Mr Rogers argued that the ANAO’s ‘misunderstanding’ of the Electoral Act was at least in part a consequence of the ANAO’s failure to consult effectively with AEC officials during the audit process:
If they’re doing an audit, I would have thought that they would have approached the key people. I’m responsible for administering that scheme … Not once was I interviewed in a formal interview as part of this process. The deputy commissioner of the AEC, who is the chair of the compliance review committee, was not interviewed at all.
At the start of an audit, the first thing we do is to communicate with the entity formally and offer an entry interview. At this audit, the AEC was represented up to a certain level in the organisation. In previous audits of the AEC, the commissioner himself has participated in the entry interview and exit interviews. We don’t dictate to the entity who should represent the entity at those opportunities; we offer the opportunity. The designation advice to the AEC that we’re auditing goes to the commissioner. The proposed report, including the offer for further discussion, goes to the commissioner… we leave it to the entity to decide who it wishes to have represent it in those discussions with us on what we’re finding and what we’re doing.
4.18
Mr Rogers also argued that the data underlying the audit report may be misleading, first because of recent legislative changes, and second because the audit was conducted at the wrong stage in the ‘compliance cycle’:
.. the legislation changed in 2018 and introduced new categories, such as political campaigner. Our feeling was that this audit would have been far more useful had it come at the end of what we call the compliance cycle and electoral cycle rather than upfront, because some of the statistics that are quoted in the report were therefore misleading because we were still seeking various returns at that point.
4.19
The ANAO noted that the audit was focused on the framework rather than the actual returns received:
…we’re auditing a framework, and that happens at a point in time. So that is what the report shows. This might apply, for example, where we’re saying returns weren’t lodged on time, and as the audit proceeded, as further returns were obtained by the AEC, we would update our data to reflect those further returns. But that would simply reflect that now more returns have come in … Yes, as the audit proceeded, the AEC would then obtain more returns, but that didn’t turn those returns into being on time; it simply meant there were now fewer returns outstanding but more late returns. So that’s what our statistics reflect.
Accuracy and reliability of regulatory information
4.20
The AEC’s approach to regulating the financial disclosure scheme prioritises educating stakeholders and therefore relies on them to comply by providing accurate and timely returns. The audit report noted that the AEC must have access to accurate, timely and complete disclosure information to successfully regulate the scheme:
To achieve the purpose of the disclosure scheme, it is important that reports be obtained from all those with a reporting obligation and that the reports obtained be timely, accurate and complete.
4.21
However, the ANAO found that the AEC’s initial analysis of disclosure returns is not sufficiently rigorous:
There is insufficient evidence that annual and election returns are accurate and complete. While the AEC checks that all fields have been completed and looks for some obvious errors it does not compare the figures disclosed with other data available from internal or external sources, instead relying on its annual compliance review program to provide sufficient evidence that the annual and election returns are accurate and complete.
4.22
Although the scheme relies on accurate information being provided to the AEC, the ANAO found that when reviewed in detail only one in five disclosure returns was found to be accurate and complete:
Over the five-year period we looked at, 78 per cent of compliance reviews required a return to be corrected in some way. That never dropped below about 67 per cent in any year, so you’re consistently finding errors that need correction through the compliance review process.
4.23
The ANAO recommended that the AEC use data analytics and matching ‘to provide greater assurance over whether data included in returns can be relied upon’.
… there are inherent difficulties and risks in using other public sources of financial information due to the different requirements of reporting to the AEC and bodies such as the Registered Organisations Commission and the Australian Charities and Not-for-profits Commission.
Risk and compliance
4.25
Generally, risk assessments should inform the direction and extent of compliance and enforcement activity. The Regulator Performance Framework states that ‘comprehensive risk assessment processes are essential to ensuring that resources are targeted to the areas requiring the most attention’. As such, for risk-based compliance and enforcement activity to be effective, an entity’s risk assessments should be properly targeted and linked to regulatory outcomes.
4.26
The audit report found that the AEC identified only one operational risk and that identified risks were not being managed according to the AEC’s own risk-management guidance.
4.27
The AEC agreed to the ANAO’s resulting recommendation that it identify and develop treatment plans for risk to the financial disclosure scheme:
The AEC agreed with this recommendation and has identified the risks of non-compliance by other persons or entities with disclosure obligations. Additional controls have also been recognised and treatment plans developed.
4.28
In relation to compliance risk, the audit report noted that the AEC had commissioned a review of its risk matrix but had not implemented the changes it recommended, and it found that ‘the AEC does not apply an appropriate risk based approach to planning and conducting compliance activities’.
4.29
The AEC argued that its compliance program is a balanced one in light of the fact that there is no evidence of widespread non-compliance:
The AEC’s risk based approach to its compliance review program balances the preservation of transparency of financial dealings with natural justice and the prudent use of Commonwealth resources. I’d point out that the AEC has not detected any systemic issues of intentional or large-scale noncompliance with the existing legislation.
4.30
Regardless, the AEC agreed with the audit report’s recommendation that it establish performance measures for its compliance program:
The AEC agreed with this recommendation and updated its performance measures for 2020-21 in accordance with the recent changes to the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The measures are currently being reviewed for 2021-22 to ensure that they continue to meet PGPA Act requirements and are relevant, reliable and complete.
Enforcement
4.31
Enforcement was a key area of disagreement between the AEC and the ANAO. The audit report concluded that the AEC was not making appropriate use of its enforcement powers:
The AEC does not appropriately act upon identified non-compliance. It is not making effective use of its enforcement powers and as such has not implemented a graduated approach to managing and acting on identified non-compliance.
4.32
The ANAO recommended that the AEC adopt a graduated approach to enforcement in line with established regulatory practice. It said the AEC should:
…implement a graduated approach to addressing non-compliance, including by making greater use of its investigatory powers and seeking to have prosecutions undertaken by the Commonwealth Director of Public Prosecutions or civil penalties applied by the courts where serious or repeat non-compliance has been identified.
4.33
The AEC disagreed with this recommendation, noting that it considers its approach to non-compliance to be appropriate:
The AEC did not agree to this recommendation as it has a graduated approach to addressing non-compliance, makes appropriate use of its investigatory powers and undertakes enforcement action where necessary. The AEC is of the view that a more heavy-handed approach to enforcement is not warranted.
4.34
In the AEC’s view, its approach to enforcement is proper and consistent with many years of practice:
The AEC welcomes all forms of scrutiny in this important area of electoral administration. The AEC has administered the funding and disclosure scheme effectively and in line with the legislative intent - transparency through disclosure - for many years.
4.35
Mr Rogers went on to emphasise that the AEC’s focus is to prevent non-compliance through education, and argued that this approach is more in line with the Electoral Act’s intent:
…the AEC’s enforcement and prosecution regime continues to reflect the legislative intent of Part XX of the Commonwealth Electoral Act … We have consistently upheld the purpose to encourage transparency and deter noncompliance by adopting an educative approach.
4.36
However, the AEC also said that there may be a place for less costly enforcement mechanisms, such as administrative penalties – that is the power to issue fines for non-compliance:
While administering the disclosure scheme the AEC has found that inaccuracies are generally administrative errors or misunderstanding of the legislation. The AEC considers there may be merit in administrative penalty powers as an additional tool in the suite of enforcement options available, particularly for straightforward matters such as late lodgement of a return.
4.37
The AEC noted, however, that this would require legislative change and additional resourcing:
Any changes to legislation would likely necessitate changes to AEC’s administrative process and systems which would have financial implications for the AEC. Additionally, as noted above, any change to the legislation is a matter for Parliament to decide.
Committee comment
4.38
The Committee acknowledges the differences in understanding between the ANAO and the AEC in relation to the frameworks applying to the financial disclosure scheme.
4.39
The Committee acknowledges the AEC’s explanation of its longstanding approach to achieve transparency through disclosure. The Committee also acknowledges the AEC’s explanation of its educative approach and its evidence that this is appropriate in many instances, including for major political parties, candidates and donors, given the serious reputational risks of non-compliance.
4.40
The AEC’s response to the ANAO report acknowledges that there is room for continuous improvement in the AEC’s approach to compliance and the Committee considers that this should occur in the context of the Regulator Performance Framework.
4.41
The Committee agrees with the ANAO’s recommendations with respect to information management, data matching and analytics, risk management and performance measurement, and considers that the administration of the scheme would be improved by their implementation.