Finance portfolio

In determining the 2022–23 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement. The ANAO also considers emerging risks from new investments, reforms or changes in the operating environment.

The primary risk identified for the portfolio relates to the department managing the effectiveness and compliance risks for its whole-of-government regulatory frameworks, particularly with respect to the proper use of resources under its procurement and grants frameworks.

Specific risks in the Finance portfolio relate to governance and financial management.

Governance

The department’s devolved approach to compliance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act) has been associated with entity non-compliance with the rules or the intent of the rules.

• Recent audits have identified a number of areas where the current regulatory approach is associated with poor levels of compliance with the Commonwealth Grant Rules and Guidelines (CGRGs) and Commonwealth Procurement Rules (CPRs), or technical compliance, and inconsistency with their intent. 
• Under the Commonwealth Performance Framework, commonwealth entities and companies must report on how performance in achieving their purposes will be measured. A risk for the Department of Finance is that if the framework is not effectively implemented it will not drive effective management of resources to deliver desired outcomes.

The Department of Finance has responsibility for a number of initiatives designed to improve efficiency and effectiveness, including the provision of shared services through the Service Delivery Office. These initiatives require both efficiencies to be identified and measured, as well as improvements to be realised in grants management and procurement outcomes.

• Audits in recent years have identified challenges in demonstrating the achievement of expected efficiencies and benefits. 

Financial management

From a whole-of-government perspective, the Department of Finance provides advice on investment strategies, including funding and equity arrangements, and associated financial reporting (including valuation approaches by Commonwealth companies). The increased use of these mechanisms brings risk to the transparency of reporting.

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.

Overview

On 1 July 2022 an Administrative Arrangements Order (AAO) took effect which included changes to the responsibilities of the Finance portfolio. Entities which are now part of this portfolio are shown in Table 1. The risk profile for each entity is based on the 2021–22 financial statements which were prepared prior to the AAO on 1 July 2022 taking effect.

Table 1: Finance portfolio entities and risk profile

Department of Finance

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

On 1 July 2022 an Administrative Arrangements Order (AAO) took effect which included changes to the responsibilities of the Department of Finance. The department’s total budgeted liabilities for 2022–23 are just under $156.1 billion, with superannuation liabilities representing 98 per cent, as shown in Figure 2. Investments represent 90 per cent of total budgeted assets.

Figure 2: Department of Finance’s total budgeted financial statements by category ($’000)

Source: ANAO analysis of 25 October 2022–23 PBS.

Financial Statements Audit

There are four key risks for the Department of Finance’s financial statements that the ANAO has highlighted for specific audit coverage in 2021–22, that the Department of Finance will have responsibility for in 2022–23. The ANAO considers that all four of these risks are potential key audit matters (KAMs).

• The complex assumptions and calculations underpinning the actuarial assessment of the public sector superannuation liability. (KAM – Valuation of superannuation provisions)
• The 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, and accounting for, outstanding insurance claims)
• The 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)
• 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).

ASC Pty Ltd

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 (CoA).

ASC Pty Ltd (ASC) and its subsidiaries, including ASC AWD Shipbuilder Pty Ltd and ASC OPV Shipbuilder Pty Ltd – support Australia’s naval capabilities. ASC was the builder of 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 submarines through the In-Service Support Contract (ISSC).

ASC is part of the Alliance-Based Target Incentive Agreement (ABTIA) that delivered three Air Warfare Destroyers (AWD) for the Royal Australian Navy. The other members of ABTIA include the CoA represented by the Department of Defence, and Raytheon Australia as the mission systems integrator.

ASC OPV  Shipbuilder Pty Ltd is contracted to provide resources and support to the Offshore Patrol Vessel (OPV) program prime contractor, Luerssen Australia, to construct the first two ships in Australia’s new fleet of modern OPVs.

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 revenue for 2020–21 was $588.5 million, with the majority attributable to revenue from contracts with customers, as shown in Figure 1.

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

Source: ANAO analysis of ASC Pty Ltd’s 2020–21 annual report.

There are two key risks for ASC’s 2021–22 consolidated financial statements.

• Recognition of employee entitlement liability for the AWD program primarily due to the complexity and judgements involved in estimating the liability for the program.
• Capitalisation of costs in relation to the Digital Transformation Program, primarily due to judgements involved for capitalisation of costs.

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 for the Commonwealth’s ongoing Naval Shipbuilding Plan. The infrastructure held by ANI at Osborne in South Australia is used by Luerssen Australia Pty Ltd for the construction of two offshore patrol vessels, BAE Systems Maritime Australia for the Hunter Class Frigate program, and ASC Pty Ltd for maintenance of the Collins class submarines under contract arrangements with the Commonwealth, represented by the Department of Defence.

ANI is a proprietary company limited by shares registered under the Corporations Act 2001. The Commonwealth, represented jointly by the Minister for Finance and Minister for Defence as Shareholder Ministers, wholly own all of ANI’s share capital.

During 2020, ANI completed a $535 million project to expand the surface shipyard at Osborne in support of the Hunter Class Frigate program and is also modernising existing facilities.

ANI’s total actual assets for 2020–21 were just over $1.5 billion, with 93 per cent of these assets attributable to property, plant and equipment, as shown in Figure 2.

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

Note: Figure 2 the revenue category includes the amount for gain on debt forgiveness (a negative expense in ANI’s published financial statements).

Source: ANAO analysis of Australian Naval Infrastructure Pty Ltd’s 2020–21 annual report.

There are two key risks for ANI’s 2021–22 financial statements that the ANAO has highlighted for specific audit coverage.

• The recognition and valuation of property, plant and equipment.
• Accounting for capital work in progress.

Both of the above risks reflect ANI’s significant investment in new assets, in addition to its existing large holdings, and the complex judgements required to estimate the fair value of these assets which includes the assets that have indicators of impairment as a result of the discontinued Attack Class Submarine Program. In addition, risk surrounding revenue recognition is an area of specific audit coverage, primarily due to anticipated increase in revenue as the shipyard developments are completed.

Future Fund Management Agency

The Future Fund Board of Guardians, supported by the Future Fund Management Agency (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 Disability Care Australia Fund Act 2013, the Medical Research Future Fund Act 2015, the Aboriginal and Torres Strait Islander Land and Sea Future Fund Act 2018, the Emergency Response Fund Act 2019, and the Future Drought Fund Act 2019, to manage the investments of the Funds as a means to provide financing sources for substantial future investments in the Australian economy.

The Future Fund’s total budgeted assets for 2022–23 are just under $224.3 billion with 98 per cent of these assets attributable to other investments, as shown in Figure 3.

Figure 5: Future Fund Management Agency’s total budgeted financial statements by category ($’000)

Source: ANAO analysis of 29 March 2022–23 PBS.

There are two key risks for the Future Fund’s 2021–22 financial statements that the ANAO has highlighted for specific audit coverage, including one risk that the ANAO considers a potential key audit matter (KAM).

• 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).
• The valuation of public market investments undertaken by the custodian of the Future Fund, due to the size of the investments.