Audit focus

In determining the 2019–20 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement, as well as emerging risks from new investments, reforms or operating environment changes. In the Communications and the Arts portfolio, considerations predominantly relate to governance, specifically the need for effective oversight of 16 highly diverse companies and other corporate entities, along with asset and financial management, particularly in relation to the Commonwealth’s significant investments in NBN Co Limited, the Australian Postal Corporation and national cultural institutions.

Governance

Government outcomes in this portfolio are largely delivered through non-departmental entities, such as corporate Commonwealth entities and government business enterprises. This presents a variety of governance and oversight risks, particularly as not all are subject to the policies and guidelines applicable to non-corporate entities.

From 2020, NBN Co Limited will transition from building to operating the national broadband network. This transition will require clarity and coherence in governance structures and change management processes, particularly given the scale and distribution of NBN Co staff and infrastructure, together with the decentralised nature of operations.

Asset management

Issues in valuations and oversight arrangements arise when the government decides to achieve policy objectives through equity and debt investments in government business enterprises, which are established to operate under commercial principles, as is the case with NBN Co Limited and the Australian Postal Corporation. The issues are around the transparency of the expenditure decisions, specifically the proportion that can be seen as being for commercial purposes (the asset component), as opposed to that provided as a social benefit to the community (the expense).

Australia’s $10.5 billion national collection is managed by a number of national cultural institutions within the portfolio. The audit of the management of the national collections examined national cultural institutions and highlighted risks in strategic collections planning and acquisition, conservation and asset management, and financial management.

The portfolio has carriage of the management of 5G spectrum, a major resource that will help facilitate accessible and sustainable communications infrastructure into the future. There are risks in achieving value for money, competition and access objectives in the management of this resource.

Financial management

The portfolio is exposed to risks regarding the transparency, consistency and appropriateness of the valuation of key assets. This includes the valuation of complex infrastructure investments in NBN Co Limited and the Australian Postal Corporation, where valuation requires significant judgement and expert assessments to determine the appropriate underlying assumptions.

Risk in the valuation of assets also arises for heritage and cultural assets within the National Gallery of Australia and the National Library of Australia, as this involves a significant level of expertise and judgement in the selection of appropriate underlying assumptions due to the unique nature of these items.

Portfolio overview

The Communications and the Arts portfolio is responsible for implementing government policy and programs with respect to digital technologies, communications services and public access to art and culture.

The Department of Communications and the Arts is the lead entity in the portfolio, with responsibilities including the promotion of an innovative and competitive communications sector, through policy development, advice and program delivery, to achieve the full potential of digital technologies and communications services. The department’s role also includes support for participation in, and access to, Australia’s arts and culture through developing and supporting cultural expression. Further information is available from the department’s website at www.communications.gov.au.

In addition to the Department of Communications and the Arts, there are 17 entities within the portfolio, excluding subsidiaries, responsible for delivering programs such as postal services, public broadcasting, national broadband infrastructure, and cultural activities.

In the 2019–20 Portfolio Budget Statements (PBS) for the Communications and the Arts portfolio, the aggregated budgeted expenses for 2019–20 total $5.68 billion. The PBS contain budgets for those entities in the general government sector (GGS) that receive appropriations directly or indirectly through the annual appropriation acts.

The level of budgeted departmental and administered expenses and the average staffing level for entities in the GGS within this portfolio are shown in Figure 1. The Department of Communications and the Arts represents the largest proportion of the portfolio’s expenses, and administered expenses are the most material component, representing 57 per cent of the entire portfolio’s expenses.

Figure 1: Communications and the Arts portfolio — total expenses and average staffing level by entity

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

Financial statements and other audit engagements

Overview

Entities within the Communications and the Arts portfolio, and the risk profile of each entity, are shown in Table 1.

Table 1: Communications and the Arts portfolio entities and risk profile

 

Type of entity

Risk of material misstatement

Number of higher risks

Number of moderate risks

Material entities 

Department of Communications and the Arts

Non-corporate

Moderate

3

1

Australian Broadcasting Corporation

Corporate

Moderate

0

3

Australian Communications and Media Authority

Non-corporate

Low

1

0

Australian Postal Corporation

Corporate

Moderate

1

2

National Gallery of Australia

Corporate

Moderate

2

0

National Library of Australia

Corporate

Low

0

1

NBN Co Limited

Company

High

4

0

Non-material entities 

Australia Business Arts Foundation Limited

Company

Low

 

Australia Council

Corporate

Low

Australian Film, Television and Radio School

Corporate

Low

Australian National Maritime Museum

Corporate

Low

Bundanon Trust

Company

Low

National Film and Sound Archive of Australia

Corporate

Low

National Museum of Australia

Corporate

Low

National Portrait Gallery of Australia

Corporate

Low

Old Parliament House

Corporate

Low

Screen Australia

Corporate

Low

Special Broadcasting Service Corporation

Corporate

Moderate

Other audit engagements (including Auditor-General Act 1997 section 20 engagements)

Australia Post Services Pty Ltd (Australian financial services licence compliance)

Australian Postal Corporation (half-year)

Australian Postal Corporation (performance standards)

STI Co (Aust) Pty Ltd

NBN Co Limited (half-year)

National DAB Licence Company Limited

         

Material entities

Department of Communications and the Arts

The Department of Communications and the Arts is responsible for policy development, advice and program delivery with respect to digital technologies, communications services and promoting access to, and participation in, art and culture.

The department’s total budgeted expenses for 2019–20 are just over $3.35 billion, with 54 per cent of these expenses attributable to payments to corporate Commonwealth entities, as shown in Figure 2.

Figure 2: Department of Communications and the Arts’ total budgeted expenses by category ($’000)

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The four key risks for the department’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers potential Key Audit Matters (KAMs), are the:

  • valuation and classification of the loan to NBN Co Limited, as it is a material balance and there are complexities in the judgements involved in calculating expected credit losses. Further, the terms and conditions of the loan are subject to renegotiation (KAM – Valuation and classification of loan);
  • valuation of the investment in NBN Co Limited, as it is a material balance and there are significant judgements required in determining the valuation methodology and complexities in valuation of estimated cost of network construction (KAM – Valuation of the Australian Government’s investment in NBN Co Limited);
  • valuation of the investment in the Australian Postal Corporation, as it is a material balance and there are significant judgements in developing key inputs, including projected cash flows, terminal value and weighted average cost of capital (KAM – Valuation of the Australian Government’s investment in the Australian Postal Corporation); and
  • management of, and accounting for, assets related to the Regional Backbone Blackspots Program, which are complex infrastructure assets requiring significant judgement and expert assessment.

Australian Broadcasting Corporation

The Australian Broadcasting Corporation (ABC) is responsible for informing, educating, facilitating public debate and fostering the performing arts by providing innovative and comprehensive broadcasting services of a high standard to the nation.

The ABC’s total budgeted expenses for 2019–20 are just over $1.13 billion, with 92 per cent of these expenses attributable to employee benefits and supplier expenses, as shown in Figure 3.

Figure 3: Australian Broadcasting Corporation’s total budgeted expenses by category ($’000)

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The ABC’s three key risks for its financial statements are the accuracy and valuation of:

  • land and buildings, as the valuations are sensitive to changes in the assumptions used in the valuation models, and contain highly specialised components;
  • program inventory, which can be externally acquired or internally developed. Complexities can arise from capturing the actual costs of various internally developed programs. The assessment of whether program inventories are impaired is also subject to judgement; and
  • the building maintenance provision, due to the judgement applied by management to the estimated cost of the maintenance works.

Australian Communications and Media Authority

The Australian Communications and Media Authority (ACMA) is responsible for the regulation of broadcasting, radio communications (spectrum management), telecommunications and online content.

ACMA’s total budgeted expenses for 2019–20 are just under $132 million, with 47 per cent of these expenses attributable to employee benefits, as shown in Figure 4.

Figure 4: Australian Communications and Media Authority’s total budgeted expenses by category ($’000)

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

ACMA’s key risk for its financial statements relates to the accounting for licensing revenue. This involves the application of professional judgement in determining when to recognise revenue, as spectrum management is technically complex and involves licensing, auctions and trading.

Australian Postal Corporation

The Australian Postal Corporation (Australia Post) is a government business enterprise responsible for operating post offices and distributing mail and parcels in Australia and internationally.

Australia Post’s total actual expenses for 2017–18 are just over $6.725 billion, with 93 per cent of these attributable to employee and supplier expenses, as shown in Figure 5. Australia Post’s total actual revenue for 2017–18 is $6.877 billion, with 98 per cent of this attributable to sales of goods and services.

Figure 5: Australian Postal Corporation’s total actual expenses by category ($’000)

Source: ANAO analysis of Australia Post’s 2017–18 annual report.

The three key risks for Australia Post’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers potential Key Audit Matters (KAMs), are the:

  • significant judgements required for the assessment of assumptions supporting the calculation of deferred revenue and the impact of the new revenue accounting standard, AASB 15 Revenue from Contracts with Customers, effective from 1 July 2018. The new standard changes the revenue recognition policy for Australia Post from ‘point in time’ to ‘over time’ to recognise revenue progressively as each stage of the mail is delivered. There is also complexity associated with contracts and arrangements entered into with multiple diverse performance obligations and volume targets that can affect the contracted price. (KAM – Revenue recognition);
  • complexity of the valuation of the Australia Post Superannuation Scheme, which manages the investment of fund contributions and the obligation of future superannuation payments, and which, consistent with prior years, has maintained a significant surplus and remains a material asset on the Australia Post balance sheet. The estimation supporting the calculation of the obligation liability is subject to sensitivity of the scheme’s economic and demographic assumptions and the scheme’s returns on investment assets, which are affected by fair value fluctuations of markets. (KAM – Accounting and valuation of Australia Post Superannuation Scheme); and
  • significant judgement required for the assessment of assumptions supporting the model used for the valuation of goodwill and the evaluation of useful life associated with other intangible assets (KAM – Valuation of goodwill and indefinite life intangible assets).

National Gallery of Australia

The National Gallery of Australia (NGA) is responsible for developing and maintaining a national collection of works of art to exhibit or to make available for others to exhibit; and making the most advantageous use of the national collection in the national interest.

The NGA’s total budgeted expenses for 2019–20 are just over $84 million, with 38 per cent of these expenses attributable to supplier and other expenses, as shown in Figure 6.

Figure 6: National Gallery of Australia’s total budgeted expenses by category ($’000)

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The two key risks for the NGA’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20 relate to the valuation of:

  • the heritage and cultural collection, which involves significant judgement and expertise due to the unique nature of these items; and
  • the NGA building, as this is a special-purpose asset with a number of unique features and is of a ‘restricted use’ nature.

National Library of Australia

The National Library of Australia (NLA) is responsible for developing and maintaining a national collection of library material, including a comprehensive collection of material relating to Australia and the Australian people, and to make this material available to the public.

The NLA’s total budgeted expenses for 2019–20 are just under $78 million, with 44 per cent of these expenses attributable to employee benefits, as shown in Figure 7.

Figure 7: National Library of Australia’s total budgeted expenses by category ($’000)

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The NLA’s key risk for its financial statements is the valuation of the national collection, due to the materiality of the balance and the judgement required in selecting the assumptions used in determining the fair value of cultural and heritage assets.

NBN Co Limited

The primary objective of NBN Co Limited is to provide wholesale services to internet service providers. NBN Co is a government business enterprise incorporated under the Corporations Act 2001.

NBN Co’s total actual expenses for 2017–18 are just under $6.8 billion, with 32 per cent of these expenses attributable to depreciation and amortisation, as shown in Figure 8.

Figure 8: NBN Co Limited’s total actual expenses by category ($’000)

Source: ANAO analysis of NBN Co Limited’s 2017–18 annual report.

The four key risks for NBN Co’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers potential Key Audit Matters (KAMs), are the:

  • valuation of network assets that are subject to a high degree of judgement and complexities arising in capturing the significant costs of network construction and software development, and in confirming that their treatment is in accordance with the relevant accounting standards (KAM – Valuation of property, plant and equipment and intangible assets – impairment; and KAM – Accuracy and completeness of depreciation and amortisation expense);
  • management of, and accounting for, complex multi-year, high-value contractual and project management arrangements with multiple suppliers, including Telstra (KAM – Accounting treatment of rights and obligations under significant contractual arrangements);
  • valuation of construction liabilities, due to the involvement of multiple delivery partners and the capitalisation of associated network assets based on their respective stage of completion at reporting date (KAM – Valuation of construction liabilities estimates); and
  • management of, and accounting for, telecommunications revenue that is increasing significantly as the network continues to be rolled out.