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, for leading the Australian Government’s international efforts to shape the regional and international environment, and for supporting the welfare of Australians overseas. Further information is available from the department’s website.

In addition to DFAT, there are five portfolio entities that are responsible for delivering programs to strengthen Australia’s security, promote export trade, share Australia’s agricultural research expertise with developing countries and grow the Australian tourism industry.

In the 2019–20 Portfolio Budget Statements (PBS) for the Foreign Affairs and Trade portfolio, after taking into account the Portfolio Additional Estimates Statements (PAES), the aggregated budgeted expenses for 2019–20 total $7.43 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 2019–20 PAES.

Audit focus

In determining the 2020–21 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 changes in the operating environment. A key area of risk for the public sector, including the Foreign Affairs and Trade portfolio, is the impact of COVID19 both on entity operations, and through the rapid implementation of new government policy responses. Portfolio risks are predominantly related to governance, specifically the need for oversight, compliance and fraud controls, value-for-money frameworks and transparency of performance. These risks are increased by the portfolio’s decentralised operations in often volatile environments and the people, property, information security, fraud and compliance control risks this presents. In an environment affected by the COVID-19 pandemic, there are additional risks relating to trade restrictions, international development assistance and intelligence sharing, overseas-based staff, and repatriation of Australians located overseas. The ANAO is considering these and broader public administration risks in its development of specific COVID-19 audit topics for 2020–21 and forward years. Any Foreign Affairs and Trade portfolio-specific topics will be published on the ANAO website as they are developed.

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.

One of the priorities of the Foreign Policy White Paper is increased engagement in the Pacific. This includes an increase in development expenditure, 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, performance and risk management, as well as transparency of value for money, impact and results against objectives.

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

DFAT manages a global workforce, some working in volatile environments and all dealing with the impact of the COVID-19 pandemic into 2020–21. DFAT 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.

Financial management

DFAT has diverse and widely distributed operating environments. In this context, 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.

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

3

Export Finance Australia

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

     

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 will lead 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 $6.22 billion, with 60 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 2019–20 PAES.

The five key risks for DFAT’s 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 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);
  • completeness and accuracy of revenue, including revenue streams such as passport operations, where revenue is collected under contractual arrangements by a third party, and 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;
  • adoption of the new accounting standard AASB 16 Leases, primarily due to the Australian Government’s significant overseas property portfolio and its significant impact on the department’s balance sheet;
  • 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; 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 upon the consistent application of DFAT’s governance framework across a geographically diverse environment. This includes the provision of international development assistance; 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).

Export Finance Australia

From 1 July 2019, the Export Finance and Insurance Corporation (EFIC) began trading under the new name of Export Finance Australia. In April 2019, changes to the Export Finance and Insurance Corporation Act 1991 provided a $1 billion increase in callable capital and a new overseas infrastructure financing power. This enables Export Finance Australia 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. The role and mandate continues to evolve.

Export Finance Australia is the government’s export credit agency. It provides financial expertise and solutions to drive sustainable growth that benefits Australia and its partners. Through loans, guarantees, bonds and insurance options, Export Finance Australia enables small to medium-sized enterprises, large corporates and governments to take on export-related opportunities, win business, grow internationally and achieve export success, and support infrastructure development in the Pacific region and beyond.

Export Finance Australia’s total actual expenses for 2018–19 were $195.4 million, with 85 per cent of these expenses attributable to interest expenses, as shown in Figure 3.

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

 

Source: ANAO analysis of Export Finance Australia’s 2018–19 Annual Report.

Export Finance Australia’s three key risks for its 2019–20 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.