PART 1
FOREWORD BY THE AUDITOR-GENERAL

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Marking 110 years of audit service to the Parliment

This is a significant year for the ANAO, as we are celebrating 110 years since the creation of the office of Auditor-General. The Audit Act 1901 was the fourth piece of legislation passed by the Parliament; it followed the passage of the two Supply Acts and the Acts Interpretation Act 1901. Thus, the office had its genesis in the earliest days of federation. The Treasurer of the day, Sir George Turner, in introducing the Audit Bill into the House of Representatives on 5 July 1901, described it as a Bill the legislature needed to enact in order that the work of the Government may be properly carried out.

In reviewing the past year, I am pleased to report that the ANAO has continued a long tradition of delivering independent, soundly based quality audit reports to the Parliament. Those reports provided recommendations and guidance on better practice to improve public administration. We also provided audit reports on the financial statements of 260 Australian Government–controlled entities.

The Parliament continues to recognise the ANAO’s contribution to improving public administration, including through strong support from the Joint Committee of Public Accounts and Audit (JCPAA), which the office appreciates.

Our support to the Parliament

The Parliament’s continuing confidence in the way the ANAO undertakes its statutory responsibilities is built on our close working relationship with the JCPAA—Parliament’s audit committee—aimed at ensuring that we are addressing the Parliament’s priorities and concerns.Our work aids the Parliament in holding the executive government to account. The ANAO is recognised for the strength of its audit conclusions and recommendations, which, for significant audits, have been subject to inquiries by committees of the Parliament.

During 2010–11, two audits were undertaken and tabled as result of formal requests: the Green Loans Program report (tabled on 29 September 2010) and the Home Insulation Program report (tabled on 15 October 2010). The audits followed requests from Senator Christine Milne and the Hon. Greg Combet MP, the then Minister Assisting the Minister for Climate Change and Energy Efficiency, respectively.

Our close relationship with the JCPAA

In building on our relationship with the Parliament, the ANAO adopts an active approach in assisting and briefing parliamentary committees, engaging with senators and members, and providing submissions and briefings to the JCPAA and other committees of the Parliament, as appropriate.

The JCPAA plays an important supporting role by providing an added parliamentary focus to our audit findings and our recommendations, which are aimed at improving public administration.The committee does this by reviewing all our audit reports and conducting public hearings and inquiries into a selection of the reports.

In undertaking this role, the committee devoted significant time in 2010–11 to these matters, including tabling Report 419: Inquiry into the Auditor-General Act 1997, in December 2010. This, was a landmark report dealing with the Auditor-General’s mandate, referred to in the following item.

JCPAA inquiry into the Auditor-General Act 1997

An important development relating to my mandate under the Auditor-General Act 1997 was the JCPAA’s inquiry into the Act and the resulting JCPAA Report 419, Inquiry into the Auditor-General Act 1997, tabled in December 2010.

The purpose of this inquiry was to review and report on whether the provisions of the Auditor-General Act 1997 remain adequate in the modern public sector environment. This is in line with the JCPAA’s statement in its Report 386 (2001) regarding the need to periodically review critical legislation such as the Auditor-General Act to ensure that its objectives are being met.

Report 419 made 13 recommendations which, if enacted as proposed, will expand my audit mandate to allow the Parliament to be better informed on the changing public sector landscape. The more significant proposed changes include:

• enabling the Auditor-General, at the request of the JCPAA, to conduct performance audits of non-Commonwealth entities that receive Commonwealth funding where there is a reciprocal responsibility to deliver specified outcomes (commonly referred to as ‘following the money’)
• amending the Act so that the functions performed by entities, including private contractors acting on behalf of the Commonwealth in the delivery of government programs, can be subject to direct audit by the Auditor-General
• enabling the Auditor-General to review an agency’s compliance with its responsibilities for a subset of performance indicators to be identified annually by the Auditor-General and forwarded to the Parliament, via the JCPAA for comment, in a manner similar to the ANAO’s annual performance audit work program
• providing explicit authority to conduct assurance engagements, such as the Major Projects Review, and utilising the same information-gathering powers that exist for the conduct of performance audits where such engagements have been identified as priorities by the Parliament
• providing the Auditor-General with the authority to initiate performance audits of Commonwealth-controlled government business enterprises.

Mr Robert Oakeshott MP, the Member for Lyne and Chair of the JCPAA, with the support of the Government, introduced the Auditor-General Amendment Bill 2011 into Parliament on 28 February 2011 to give effect to the central recommendations in the committee’s report. The Bill is still under consideration by the Parliament.

Our audit program

Over the years, governments have acted to improve public administration following the tabling of our performance audit reports, which provide information on government programs and make recommendations to enhance accountability for program administration. These audit reports provide a positive stimulus to advance public administration and improve accountability.

The highlights of the year’s performance audit work are detailed in Part 3 of this annual report. During 2010–11, the ANAO tabled 54 performance audit reports. Looking across the audit reports tabled during the year, it is apparent that the performance by public sector agencies in implementing new policy measures has been mixed. There is also more to be done in requiring a stronger focus on the performance of government programs, particularly on their impact. The returns can be significant in providing greater transparency in government operations, in allowing better targeting of programs by government, and in improving administrative efficiency. This is in the interests of good government.

Two performance audit reports in particular underline the importance of effective implementation in achieving government policy objectives: Audit Report No.9 2010–11, Green Loans Program, and Audit Report No.12 2010–11, Home Insulation Program.

Other well-received audits that highlighted the need for improved public administration included Audit Report No.11 2010–11, Direct Source Procurement; Audit Report No.33 2010–11, The Protection and Security of Electronic Information Held by Australian Government Agencies; and Audit Report No.57 2010–11, Acceptance into Service of Navy Capability.

Our audits of financial statements assist Australian Government entities to fulfil their annual accountability obligations under the Financial Management and Accountability Act 1997 (FMA Act), the Commonwealth Authorities and Companies Act 1997 (CAC Act) or the Corporations Act 2001.

In addition to the audit opinion on the financial statements, the ANAO provides each audited entity with a report on the findings of the financial statement audit and an assessment of the entity’s internal control regime and accounting processes relevant to the preparation of the financial statements. A copy is also provided to the responsible minister.

Additionally, each year the ANAO tables two reports on its financial statement audit program:

• Audits of the Financial Statements of Australian Government Entities, tabled in December each year. There were no qualified opinions for the 2009–10 financial year and, as in recent years, there was a reduction in the number and significance of issues arising from the final phase of the 2009–10 financial statement audits.
• Interim Phase of the Audit of Financial Statements of Major General Government Sector Agencies, tabled in June each year. The 2010–11 financial year reflected the continuing reduction over recent years in the number of significant and moderate risk audit findings, which demonstrates the general stability and maturity of the control regimes in most government entities. However, our audits continue to identify control weakness in areas such as the management of inventories, business systems, and business continuity management.

Ongoing developments in accounting and auditing frameworks and standards continue to have an impact on the financial reporting responsibilities of public sector entities and on the ANAO’s auditing methodology. We continue to devote significant resources to the implementation of revised auditing and accounting requirements.

Part 3 of this annual report provides further information on our audits of the financial statements of public sector entities.

Our contribution to promoting better practice

It has been a longstanding practice of the ANAO to reinforce our audit findings and recommendations through the publication of our better practice guides, which are designed to provide practical, workable guidance to promote better practice in specific areas of public administration. The better practice guides issued in 2010–11 provided guidance on the management of assets by public sector entities, fraud control, and risk and controls for human resources information systems. The guides, which draw on our audit experience, continue to be very well received, and I look forward to them continuing to have a positive impact on public administration.

Our 110th anniversary

As mentioned above, this year marks 110 years since the first Commonwealth Parliament created the office of Auditor-General as an independent public official with wide powers of investigation to scrutinise Commonwealth administration and provide independent, impartial assessments on the state of the public accounts. The ANAO is one of only a handful of Commonwealth entities that can trace their origins back to federation.

Over our 110 years, the office has undergone a number of fundamental shifts in the way it fulfils its statutory responsibilities. Initially, as required by the Audit Act 1901, the office conducted a complete checking and reporting of all transactions through government. It was not until the 1920 amendments to the Audit Act that the 100 per cent check requirement was formally abolished. During this early period there were many challenges for the fledgling office, including the introduction of commercial activities of government (the Post Office and the Commonwealth Bank) and the impact of the First World War.

The predominant focus on the integrity of financial reports and on ensuring the compliance of financial transactions with relevant laws and regulations was maintained until the 1970s. The 1976 Coombs Commission (the Royal Commission on Australian Government Administration) provided an opportunity for the then Auditor-General, Don Steele Craik, to successfully argue that parliamentary scrutiny would be greatly improved if a fresh approach to the role of the Auditor-General could be engineered, allowing Parliament to have independent and expert advice on the economy and efficiency achieved in government financial administration.

There have been two comprehensive reviews into the Australian National Audit Office. The first was by the Joint Committee of Public Accounts in 1989, when Report 296, The Auditor-General: Ally of the People and Parliament, importantly recommended that the Auditor-General continue to have responsibility for performance audits. The committee also endorsed the importance of the performance audit function to the Parliament.

The second, referred to above, was the recent JCPAA Report 419, which recommended giving the Auditor-General greater authority to ‘follow the dollar’ where non-Commonwealth bodies are in receipt of Commonwealth funding to deliver agreed outcomes, recognising that changes have occurred in the way the Commonwealth and the states and territories interact and are expected to interact in the future.

Over our 110 years, there have been 14 Auditors-General, each of whom contributed to what the office is today. Our role is unique, and the audit work undertaken by the ANAO forms an important link in the accountability chain from the public sector to the Parliament and ultimately to the Australian community.

Our contribution to the auditing and accounting professions

The ANAO continues to support the auditing and accounting professions by providing speakers at conferences and seminars, commenting on draft standards, and serving on committees and professional bodies. Senior ANAO staff held positions on the boards of CPA Australia and the Institute of Chartered Accountants during the year, and other staff members are involved in the work of professional bodies through their committees. I am Deputy Chair of the Australian Accounting Standards Board and have completed a two-year term as President of the ACT Division of the Institute of Public Administration Australia.

Our international activities

Hosting a range of international delegations

In 2010–11, the ANAO once again hosted a range of international visiting groups. We were pleased to meet colleagues from Vietnam, Russia, China, Bangladesh, New Zealand, Canada, Brazil and the United States. ANAO staff enjoy meeting international colleagues and sharing information in these less formal settings. During the year, ANAO staff also met with members of the Norwegian Parliament, the Indonesian Ministry of Finance, the Iraqi Ministry of Finance, the Papua New Guinean Ombudsman’s Office and the United Nations Population Fund. Two representatives of the Samoan Audit Office took part in our performance audit learning and development course.

ANAO–AusAID programs

The ANAO participates in two key AusAID-funded programs which have been in place since 2007. The objective of the programs is to assist in capacity building in auditing and governance in our region.

One program is funded under the auspices of the Australia–Indonesia Government Partnership Fund and includes a range of activities to support the Indonesian Board of Audit (Badan Pemeriksa Keuangan or BPK). The program has three elements: the provision of technical advice and professional educational support as required; the secondment of BPK staff to the ANAO for up to 11 months; and the deployment of an ANAO Senior Executive Service officer to Jakarta to support the program on the ground and to provide technical and advisory support to BPK.

Our second program provides support to the Papua New Guinea Auditor-General’s Office (PNG AGO) and has two elements. The first involves the Strongim Gavman Program (SGP), under which two ANAO officers have been placed as senior advisers to the Papua New Guinea Auditor-General and his deputies. The ANAO has had SGP advisers on deployment in the PNG AGO, through the current program and its predecessors, for a number of years. The second element of the program is the ANAO – PNG AGO Twinning Scheme, under which we provide a range of support activities to the PNG AGO, including visits of our staff to the PNG AGO to build capacity in auditing and governance. Papua New Guinea graduate auditors participate in the ANAO’s graduate program and are seconded to the ANAO for 11 months. We also coordinate placements of PNG AGO audit managers and graduates in the Queensland Audit Office and the New South Wales Audit Office.

Papers delivered at international forums

I presented a paper on environmental auditing and sustainable development at the 20th International Congress of Supreme Audit Institutions (INCOSAI) in Johannesburg, South Africa, in October 2010. The Deputy Auditor-General presented a paper on the fallout of the global financial crisis and lessons arising from that for government agencies and supreme audit institutions at the 12th Global Working Group of Auditors-General meeting in Kumarakom, India, on 21–23 March 2011. In addition, I presented a keynote paper on aligning institutional capacity and the performance of supreme audit institutions at the 21st Conference of Commonwealth Auditors-General, held in Windhoek, Namibia, on 10–13 April 2011.

International peer review activities

As I noted in last year’s report, during 2009–10 the ANAO led a peer review of the Office of the Auditor General of Canada (OAG), providing an independent opinion on whether OAG’s quality management system was suitably designed and operating effectively to provide reasonable assurance that the OAG complied with relevant legislative authorities and professional standards in conducting its audit program. The peer review was well received by the Canadian Standing Committee on Public Accounts and Audit in September 2010, with the chair of the committee, on behalf of all members of the Canadian Parliament, thanking ANAO staff and other members of the review team for their efforts. It was very pleasing to note that as part of her final report to the Canadian Parliament in May 2011, Serving Parliament through a Decade of Change, the retiring Auditor General, Ms Sheila Fraser, stated her belief that the peer review was one of the most extensive peer reviews of a legislative audit office that has ever been done.

Our resources

The ANAO continues to benefit from increased funding in the 2009–10 budget for our performance audit program, IT audit and technical support capacity. However, in common with other agencies, the ANAO is facing increased employee and supplier costs. I am conscious of the overall pressures on the Government’s budget, and the ANAO will continue to manage additional resource pressures, such as the ongoing additional requirements of new auditing standards, salary and contract costs, and the range of efficiency dividends applied to the public sector.

While we are not seeking additional budget supplementation at this time, further pressure may result from the implementation of the JCPAA’s recommendations in Report 419, Inquiry into the Auditor-General Act 1997, in relation to the conduct of audits of key performance indicators. This is not expected to affect the ANAO’s 2011–12 budget. However, an audit program involving an assessment of a subset of agency key performance indicators would involve a substantial commitment of resources, in addition to initial set-up costs.

Overall, the office is in a manageable resource position. With appropriate attention to managing our costs, we are confident of delivering our corporate outcomes over the next 12 months.

Our staff

The high regard in which the ANAO is held is due to the commitment and professionalism of my staff and my senior leadership group. Our work has gained wide parliamentary and community acceptance, which reflects well on the solid work undertaken by the office.

Two of my staff are currently providing long-term in-country support to BPK and the PNG AGO: Dr Paul Nicoll is on posting to Jakarta, and Wayne Jones is stationed in Port Moresby.

Several staff received awards to recognise their achievements in ‘going the extra distance’ in delivering our audit products or delivering on our corporate goals. Our strengths lie in our ability to anticipate significant issues and to respond rapidly when required. Our achievements during these challenging times have placed the office on a sound footing for the coming year, notwithstanding the challenges of managing an increasing workload associated with delivering a larger audit work program in accordance with increasing professional requirements in a more complex public sector.

I wish to thank all ANAO staff for their professionalism, enthusiasm and flexibility during the year, and for the support given to me to allow me to discharge my statutory responsibilities.

Ian McPhee
Auditor-General