Finance | Australian National Audit Office

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 Finance portfolio, considerations predominantly relate to its responsibilities to advise the government on, and oversee the implementation of, governance frameworks for the effective management of the public sector. The Department of Finance has particular responsibilities for the rules and guidelines regarding financial management across all government entities. This creates risks in how the department gains assurance that these rules and guidelines are being implemented as intended, and that the operations of government are transparent to the parliament.

Governance

Finance has the capacity to leverage its unique position in relation to the Public Governance, Performance and Accountability Act 2013 (PGPA Act), resource management, governance and reporting matters to influence positive change and compliance in the Australian Government sector. This includes performance measures and reporting (such as the incorporation of efficiency measures), corporate planning, and the role of audit committees. Recent audits focusing on PGPA Act topics have identified a number of areas where the current light touch regulatory approach is associated with poor levels of compliance (such as for corporate plans, annual performance statements and procurement arrangements).

As part of the ‘smaller government’ reforms, the Department of Finance has responsibility for a number of initiatives designed to improve efficiency and effectiveness. The reforms with respect to shared services require both efficiencies to be identified and measured as well as improvements realised in grants management and procurement outcomes (including Indigenous procurement). Audits in recent years have identified challenges in these areas.

Financial management

From a whole-of-government perspective, the Department of Finance has some responsibilities with respect to investment strategies, including funding and equity arrangements, and associated financial reporting (including valuation approaches by Commonwealth companies). Other risks in financial management and reporting include the judgements involved in the assumptions and calculations underpinning the public sector superannuation liability and the self-managed general insurance fund liabilities, together with the valuation of the property portfolio assets.

Portfolio overview

The Finance portfolio is responsible for the preparation of the consolidated financial statements (CFS) of the Australian Government and a range of finance-related functions that include providing the Australian Government with budget policy advice and responsibility for superannuation arrangements for government employees and asset sales.

The Department of Finance is the lead entity in the portfolio and is responsible for supporting the government’s budget process and oversight of public sector resource management, governance and accountability frameworks. In addition, the department is responsible for the preparation of the annual CFS, which includes the whole-of-government and the general government sector financial statements and the Australian Government’s financial outcome. Further information is available from the department’s website at www.finance.gov.au.

In addition to the Department of Finance, there are six entities (excluding subsidiaries) within the portfolio that are responsible for electoral administration; supporting retirement and insurance benefits for members of Commonwealth superannuation schemes; managing the investment activities of the Future Fund and other funds; auditing and reporting of parliamentarians’ work expenses; and supporting Australia’s naval defence capability.

In the 2019–20 Portfolio Budget Statements (PBS) for the Finance portfolio, the aggregated budgeted expenses for 2019–20 total $12.56 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 Finance represents the largest proportion of the portfolio’s expenses, and administered expenses are the most material component, representing 93 per cent of the entire portfolio’s expenses.

Figure 1: Finance 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 Finance portfolio, and the risk profile of each entity, are shown in Table 1.

Table 1: Finance portfolio entities and risk profile

	Type of entity	Risk of material misstatement	Number of higher risks	Number of moderate risks
Material entities
Department of Finance	Non-corporate	Moderate	2	1
ASC Pty Ltd	Company	Moderate	1	0
Australian Naval Infrastructure Pty Ltd	Company	Moderate	0	1
Future Fund Management Agency and Board of Guardians	Non-corporate	Moderate	1	1
Non-material entities
Australian Electoral Commission	Non-corporate	Low
Commonwealth Superannuation Corporation	Corporate	Moderate
Independent Parliamentary Expenses Authority	Non-corporate	Low
Other audit engagements (including *Auditor-General Act 1997* section 20 engagements)
Administered investment funds
ARIA Alternative Assets Trust
ARIA Co Pty Ltd
ARIA Investments Trust
ARIA Investments Trust (Australian Prudential Regulation Authority (APRA) reporting and prudential standards)
ARIA Property Fund
ASC Pty Ltd and its consolidated entities (half-year)
Commonwealth Superannuation Corporation (CSC) (Australian financial services licence compliance and registrable superannuation entity licence compliance)
CSC Treasury Trust
Commonwealth Superannuation Scheme (CSS)
Commonwealth Superannuation Scheme (APRA reporting and prudential standards)
Future Fund Investment Company No. 1 Pty Ltd
Future Fund Investment Company No. 2 Pty Ltd
Future Fund Investment Company No. 3 Pty Ltd
Future Fund Investment Company No. 4 Pty Ltd
Future Fund Investment Company No. 5 Pty Ltd
MRFF Investment Company No. 1 Pty Ltd
MRFF Investment Company No. 2 Pty Ltd
Property Management Trust
Public Sector Superannuation Accumulation Plan (PSSap)
PSSap (APRA reporting and prudential standards)
Public Sector Superannuation Scheme (PSS)
PSS (APRA reporting and prudential standards)
PSS CSS A Property Trust
PSS CSS B Property Trust
PSS CSS Investments Trust

Material entities

Department of Finance

The Department of Finance is responsible for supporting the government’s budget process and oversight of public sector resource management, governance and accountability frameworks, as well as the production of the Australian Government’s consolidated financial statements.

The department’s total budgeted expenses for 2019–20 are just over $11.65 billion, with 72 per cent of these expenses attributable to superannuation, as shown in Figure 2.

Figure 2: Department of Finance’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 three 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:

complex assumptions and calculations underpinning the actuarial assessment of the public sector superannuation liability (KAM – Valuation of superannuation provisions);
estimation of the outstanding claims liability for the Australian Government’s self-managed general insurance fund, due to the complex calculation of the liability that involves assumptions requiring significant judgement (KAM – Valuation of the liability and accounting for outstanding insurance claims); and
valuation of the property portfolio, which consists of a large number of properties with unique characteristics. The process is complex and involves the use of different valuation methods that require significant judgement on the selection of assumptions within the valuation models (KAM – Valuation of properties).

ASC Pty Ltd

ASC Pty Ltd (ASC) supports Australia’s naval capabilities. ASC built Australia’s fleet of Collins Class submarines for the Royal Australian Navy and is responsible for the ongoing design enhancements, maintenance and support of the Collins Class submarines through the in-service support contract.

ASC is also part of the alliance-based contract arrangement to deliver three Air Warfare Destroyers for the Royal Australian Navy. This alliance is made up of the Department of Defence, representing the Australian Government, ASC as the lead shipbuilder, and Raytheon Australia as the mission systems integrator.

On 10 August 2018, ASC established a new subsidiary, ASC OPV Shipbuilder Pty Ltd. This company will construct the first two ships in Australia’s new fleet of modern offshore patrol vessels.

On 14 December 2018, the government transferred ASC’s subsidiary, ASC Shipbuilding Pty Ltd, to BAE Systems to build the next generation of frigates for the Royal Australian Navy. At the end of the build, ASC Shipbuilding Pty Ltd will return to Commonwealth ownership.

ASC is a proprietary company limited by shares registered under the Corporations Act 2001. The Minister for Finance is the sole shareholder minister on behalf of the Commonwealth of Australia.

ASC’s total actual expenses for 2017–18 are just over $719 million, with 52 per cent of these expenses attributable to labour expenses, as shown in Figure 3.

Figure 3: ASC Pty Ltd’s total actual expenses by category ($’000)

Source: ANAO analysis of ASC Pty Ltd’s 2017–18 annual report.

The key risk for ASC’s financial statements is the revenue and profit recognition in relation to the Air Warfare Destroyer (AWD) program and the Collins class submarine in-service support contract, due to the material nature of the AWD program and the complex nature of the contracts.

Australian Naval Infrastructure Pty Ltd

Australian Naval Infrastructure Pty Ltd (ANI) was established to acquire, hold, manage and develop the infrastructure and related facilities used in connection with the domestic manufacture of naval vessels. The infrastructure held by ANI at Osborne in South Australia is used by the Air Warfare Destroyer program operator, the AWD Alliance (ASC, Raytheon Australia and the Commonwealth) in its manufacture of vessels by Luerssen Australia Pty Ltd in its manufacture of two offshore patrol vessels and by ASC Pty Ltd for maintenance of the Collins Class submarines under contract arrangements with the Commonwealth, represented by the Department of Defence.

ANI is also undertaking a $535 million project to expand and modernise the surface shipyard at Osborne in support of the Hunter class frigate program, and in conjunction with Naval Group and the Commonwealth, is developing a new submarine yard which will be utilised for construction of the Attack Class submarines.

ANI is a proprietary company limited by shares registered under the Corporations Act 2001. The Commonwealth, represented by the Minister for Finance, owns all shares in ANI.

ANI’s total actual expenses for 2017–18 are just over $24 million, with 64 per cent of these expenses attributable to depreciation and amortisation, as shown in Figure 4.

Figure 4: Australian Naval Infrastructure Pty Ltd’s total actual expenses by category ($’000)

Source: ANAO analysis of Australian Naval Infrastructure Pty Ltd’s 2017–18 annual report.

The key risk for ANI’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20 is the valuation of property, plant and equipment, reflecting ANI’s large holdings of such assets and the complex judgements required to estimate the fair value of the assets.

Future Fund Management Agency

The Future Fund Management Agency, which supports the independent Future Fund Board of Guardians (together, the Future Fund), is responsible for investing the assets of the Future Fund under the Future Fund Act 2006 and other investment funds, managed on behalf of the Department of Finance, under the Nation-building Funds Act 2008, the DisabilityCare Australia Fund Act 2013, the Aboriginal and Torres Strait Islander Land and Sea Future Fund Act 2018 and the Medical Research Future Fund Act 2015, for the benefit of future generations of Australians.

The Future Fund’s total budgeted expenses for 2019–20 are just under $545 million, with 89 per cent of these expenses attributable to supplier expenses, as shown in Figure 5.

Figure 5: Future Fund Management Agency’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 Future Fund’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 Matter (KAM), are the:

valuation of private market investments, due to the inherent subjectivity and significant judgements and estimates required where market data is not available to determine the fair value of these investments (KAM – Valuation of private market investments); and
effectiveness of governance processes over investments, including monitoring external service providers and the custodian.