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 Foreign Affairs and Trade portfolio, considerations predominantly relate to governance, specifically the need for oversight, compliance and fraud controls, value-for-money frameworks, and transparency of performance. These considerations are driven by the portfolio’s decentralised operations in volatile environments, and the people, property, information security, fraud and compliance control risks this presents.

Governance

Emerging risks in the portfolio are derived partly from the challenges outlined in the 2017 Foreign Policy White Paper, which discusses shifts in the balance of power between nation states, including in the Indo-Pacific region, and increasing interconnections between domestic and international security. Clarity and coherence in DFAT’s policymaking and governance arrangements are critical in managing related risks, including maximising the benefits from diplomatic, intelligence and development efforts in the region.

DFAT manages a global workforce, often working in volatile environments, and also provides consular and crisis response for Australians living and travelling internationally. The audit of DFAT’s delivery of overseas security highlighted risks for DFAT people and property in not undertaking comprehensive planning, not achieving full implementation of all security measures, and not complying with delivery of required training for staff.

Recent audit work has identified the need for improvement in the portfolio’s reporting of performance to enhance transparency of, and accountability for, progress in achieving entity purposes.

International interest in the work of DFAT and the information it holds results in a heightened need for cyber resilience.

One of the priorities of the Foreign Policy White Paper is increased engagement in the Pacific. This includes an increase in development expenditure in the region, establishment of a $2 billion Pacific infrastructure facility, and the delivery of a high-speed undersea internet cable from Australia to Papua New Guinea and the Solomon Islands. These investments will require strong contract, project and performance management, as well as transparency of value for money, impact and results against objectives.

Financial management

DFAT has diverse and widely distributed operating environments. In this environment, strong financial management, particularly in relation to controls around payments of international development assistance, are essential to address fraud risks and inconsistent processes across different locations.

DFAT manages a significant overseas property portfolio and the valuation of these assets is highly sensitive to changes in the underlying assumptions.

Portfolio overview

The objective of the Foreign Affairs and Trade portfolio is to advance Australia’s security and prosperity in a contested and competitive world, as supported by the implementation of the 2017 Foreign Policy White Paper.

The Department of Foreign Affairs and Trade (DFAT) is the lead entity in the portfolio and is responsible for providing foreign, trade and development policy advice and for leading the Australian Government’s international efforts to shape the regional and international environment. Further information is available from the department’s website at www.dfat.gov.au.

In addition to DFAT, there are five entities within the portfolio that are responsible for delivering programs to strengthen Australia’s security, promote export trade, support the welfare of Australians overseas, and grow the Australian tourism industry.

In the 2019–20 Portfolio Budget Statements (PBS) for the Foreign Affairs and Trade portfolio, the aggregated budgeted expenses for 2019–20 total $7.33 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. DFAT represents the largest proportion of the portfolio’s expenses, and of this, administered expenses are the most material component, representing 64 per cent of the entire portfolio’s expenses.

Figure 1: Foreign Affairs and Trade 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 audits

Overview

Entities within the Foreign Affairs and Trade portfolio, and the risk profile of each entity, are shown in Table 1.

Table 1: Foreign Affairs and Trade portfolio entities and risk profile

 

Type of entity

Risk of material misstatement

Number of higher risks

Number of moderate risks

Material entities 

Department of Foreign Affairs and Trade

Non-corporate

Moderate

2

4

Export Finance and Insurance Corporation

Corporate

Moderate

0

3

Non-material entities 

Australian Trade and Investment Commission

Non-corporate

Low

 

 

Australian Centre for International Agricultural Research

Non-corporate

Low

Australian Secret Intelligence Service

Non-corporate

Low

Tourism Australia

Corporate

Low

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

Nil

         

Material entities

Department of Foreign Affairs and Trade

The Department of Foreign Affairs and Trade (DFAT) supports Australia’s foreign, trade and investment, development and international security policy priorities. DFAT is the lead agency managing Australia’s international presence and leads efforts to maximise Australia’s security and prosperity through implementation of the 2017 Foreign Policy White Paper.

DFAT’s total budgeted expenses for 2019–20 are $6.16 billion with 51 per cent of these expenses attributable to payments in relation to International Development Assistance, as shown in Figure 2.

Figure 2: Department of Foreign Affairs and Trade’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 six key risks for DFAT’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers Key Audit Matters (KAMs), are the:

  • completeness and accuracy of revenue from passport operations, as a significant proportion of that revenue is collected under contractual arrangements by a third party;
  • accuracy of revenue for rental accommodation and other services provided to other government entities at overseas posts, calculated using an activity-based costing model. The model is supported by a significant volume of information related to staffing and floor space requirements provided in annual returns submitted by each post;
  • valuation of the Australian Government’s significant overseas property portfolio, due to the sensitivities in changes to the assumptions supporting these valuations (KAM – Valuation of overseas property);
  • management of, and accounting for, loans, subscriptions and multilateral liabilities due to the complexity of membership arrangements, and significant judgements, which involve timing of future cash flows, currency and interest rate risks, and selection of appropriate discount rates used to determine their fair value at year end (KAM – Valuation of other investments);
  • accuracy and completeness of international development assistance, due to the significant geographical spread of aid program recipients, the diverse range of aid program agreements with varying performance assessment obligations, and the significant components of the program that are paid through third-party providers. (KAM – Accuracy and completeness of international development assistance); and
  • completeness and accuracy of financial information associated with overseas post operations, which contributes to a number of balances within DFAT’s financial statements and relies on the consistent application of DFAT’s governance framework across a geographically diverse environment.

Export Finance and Insurance Corporation

The Export Finance and Insurance Corporation (Efic) is responsible for facilitating and encouraging Australian export trade on a commercial basis. Efic provides financial support to selected Australia-based companies exporting or seeking to expand internationally.

In 2019, Efic’s mandate was expanded to include the ability to finance infrastructure projects by increasing Efic’s callable capital and granting it a new overseas infrastructure financing power. This will enable Efic to both finance more and larger projects, and expand its capabilities to regional infrastructure projects that have a broad national benefit for Australia, including for Australian businesses.

Efic’s total actual expenses for 2017–18 were $159.41 million, with 82 per cent of these expenses attributable to interest expenses, as shown in Figure 3.

Figure 3: Export Finance and Insurance Corporation’s total actual expenses by category ($’000)

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

Efic’s three key risks for its financial statements are the:

  • valuation and classification of complex financial instruments involving structured bonds, interest rate swaps and cross-currency swaps that are significant in value;
  • valuation and impairment of loans, guarantees, and available-for-sale investments, due to the judgements and estimates applied to calculate the balances; and
  • recognition of interest income earned on interest-bearing financial assets, due to the significant balance of this account.