1. The ANAO publishes an annual audit work program (AAWP) which reflects the audit strategy and deliverables for the forward year. The purpose of the AAWP is to inform the Parliament, the public and government sector entities of the planned audit coverage for the Australian Government sector by way of financial statements audits, performance audits and other assurance activities. As set out in the AAWP, the ANAO prepares two reports annually that, drawing on information collected during audits, provide insights at a point in time to the financial statements risks, governance arrangements and internal control frameworks of Commonwealth entities. These reports provide Parliament with an independent examination of the financial accounting and reporting of public sector entities.

2. These reports explain how entities’ internal control frameworks are critical to executing an efficient and effective audit and underpin an entity’s capacity to transparently discharge its duties and obligations under the Public Governance, Performance and Accountability Act 2013 (PGPA Act). Deficiencies identified during audits, that pose either a significant or moderate risk to an entity’s ability to prepare financial statements free from material misstatement, are reported.

3. This report presents the final results of the 2019–20 audits of the Consolidated Financial Statements (CFS) and 245 Australian Government entities. Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities (Auditor-General Report No.38), focused on the interim results of the audits of 24 of these entities.

Consolidated financial statements

4. The CFS presents the whole of government and the general government sector financial statements. The 2019–20 CFS were signed by the Minister for Finance on 24 November 2020 and an unmodified auditor’s report was issued on 24 November 2020.

Financial audit results and other matters

Quality and timeliness of financial statements preparation

5. The ANAO issued 232 unmodified auditors’ reports, including the CFS, and one modified auditors’ report, as at 24 November 2020. A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting.

6. The ANAO noted a decrease in findings relating to processes supporting financial statements preparation; reduced delivery of draft financial statements in line with entity financial statement project plans; and an increase in the total value of audit adjustments reported to entities in 2019–20 compared to 2018–19. These observations, in regards to timeliness of financial statements and the total value of audit differences, indicate there is still an opportunity to improve quality assurance frameworks over financial statements process, noting that the reduced number of findings indicates some improvement has been made.

Timeliness of financial reporting

7. The financial statements were finalised and auditor’s reports issued for 77 per cent of entities within three months of the financial year end. On average it took entities an additional 40 days to table their annual reports in Parliament. Sixty-two per cent of entities that are required to table an annual report in Parliament, tabled prior to the date of the portfolio’s Senate budget estimates hearing. Of the remaining entities, eight per cent had not tabled an annual report as at 24 November 2020.

Key audit matter reporting

8. The ANAO has applied ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report for the 24 entities included in Auditor-General Report No. 38 and the Australian Government’s CFS. In 2019–20 a total of 56 key audit matters (KAM) were included across the

24 entities and seven KAM were included in the CFS auditor’s report.

IT Controls and Cyber Security Risks

9. The 2020 Australian Cyber Security Strategy¹ highlights the importance of protecting Australians online, especially during the COVID-19 pandemic. As part of the response to the COVID-19 pandemic 186 entities implemented some form of remote working. The majority of entities assessed their existing IT general controls as being appropriate to support remote working arrangements, with only 15 of the 186 entities needing changes to IT general controls.

Financial sustainability

8. An assessment of an entity’s financial sustainability can provide an indication of financial management issues or signal a risk that the entity will require additional government funding. Our analysis concluded that the financial sustainability of the majority of entities was not at risk. The assessment identified that eight entities were significantly impacted by the COVID-19 pandemic and required either additional funding, letters of support or a restructuring of operations.

Summary of audit findings

10. A total of 142 findings were reported to entities as a result of the 2019–20 financial statements audits. These comprised two significant, 22 moderate and 118 minor findings. One significant legislative breach was also reported during 2019–20.

11. The highest number of findings continue to be in the categories of:

• compliance and quality assurance frameworks supporting program payments and financial reporting; and
• management of IT security and user access, in particular the management of privileged users.

Implementation of AASB 16 Leases

12. The revised leasing standard, AASB 16 Leases (AASB 16), was effective for financial years commencing on or after 1 January 2019; impacting government entities in the 2019–20 financial year. AASB 16 significantly increases the recognition and disclosure of leases by lessees with the majority of leases previously treated as operating leases now recognised on the balance sheet. The quality of the implementation of AASB 16 was assessed by considering the number of audit differences identified in relation to AASB 16. The low number and dollar value of audit differences indicates entities were effective in the implementation of AASB 16.

Management of Staff Leave

13. During 2019–20, as a result of the increase in findings relating to human resource management and administration across Australian Government entities during the period from 2015–16 to 2018–19, the ANAO undertook targeted assurance activities over the management of staff leave in three entities. The analysis performed identified weaknesses in processes relating to staff leave and associated monitoring controls.

Reporting and auditing frameworks

Changes to the Australian public sector reporting framework

14. The ANAO’s experience with 2019–20 financial statements audits identified particular challenges for entities when dealing with the impact of the COVID-19 pandemic. ANAO staff were restricted in their ability to physically access entities’ premises leading to the increased use of remote access to entity financial management and relevant operational systems. The Government’s increasing utilisation of online services in supporting the response to major events such as the COVID-19 pandemic necessitates the need for entities to protect critical information from malicious actors.

15. Assuring performance information is an emerging area of practice in the Australian and international audit profession. The PGPA Act provides the basis for the Commonwealth performance framework. In response to a request from the Finance Minister in August 2019, the Auditor-General agreed to conduct pilot assurance audits of the 2019–20 performance statements of three entities. The ANAO completed the audits of two of those entities.

16. During 2019–20, the ANAO continued to progress the goals of its Data Analytics Strategy 2018–20 by extending data analytics solutions to an increased number of audits. In 2019–20, 80 per cent of the audits of major entities conducted in-house involved the use of data analytics as part of the financial statements audit program.

Cost of this report

17. The cost to the ANAO of producing this report is approximately $474,000.

Background

1.1 Government accountability and transparency is supported by the preparation and audit of the Australian Government’s Consolidated Financial Statements (CFS). The CFS and the associated financial analysis provide information to assist users in assessing the financial performance and position of the Australian Government. The CFS is prepared by the Department of Finance (Finance) and issued by the Minister for Finance.

1.2 The CFS presents the consolidated whole of government financial results inclusive of all Australian Government controlled entities, as well as the General Government Sector (GGS) financial statements. The 2019–20 CFS is prepared in accordance with section 48 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the requirements of the Australian Accounting Standards, including AASB 1049 Whole of Government and General Government Sector Financial Reporting (AASB 1049).

1.3 AASB 1049 requires, with limited exceptions, the principles and rules in the Australian Bureau of Statistics’ Government Finance Statistics (GFS) Manual to be applied where compliance with the GFS Manual would not conflict with Australian Accounting Standards.

Key areas of financial statements risk

1.4 The ANAO’s 2019–20 audit approach identified key areas of financial statements risk that had the potential to impact the CFS.

Audit results

1.5 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits of the CFS.

Australian Government’s financial outcome for 2019–20

Operating result

1.6 The following key financial measures were reported for 2019–20:

• net operating balance was a deficit of $99.7 billion (2018–19: surplus of $3.2 billion);
• operating result was a deficit of $133.9 billion (2018–19: deficit of $39.7 billion); and
• comprehensive result (change in net worth) was a decrease in net worth of $135.6 billion compared to a decrease of $127.4 billion in 2018–19.

1.7 The net operating balance has returned to a deficit due to a decrease in revenue of 1.5 per cent, an increase in operating expenses of 10.7 per cent, and additional subsidy expenses and personal benefits increase of 27.1 per cent (primarily resulting from the government’s economic response to the impact of COVID-19). The increased spending includes $55.2 billion for JobKeeper payments and cash flow boost to support businesses, additional personal benefit expenses of $15.7 billion and additional purchases of $10.0 billion for NDIS, aged care, medical and pharmaceutical benefits. Revenue fell by approximately $7.5 billion because of lower taxation revenue as a result of the contraction in economic activities due COVID-19.

1.8 In addition to the factors affecting the net operating balances discussed above, the operating result deficit includes net write-down of assets of $9.1 billion mainly resulting from impairment of tax receivables, net fair value movements in financial instruments of $18.2 billion and other losses of $6.9 billion.

1.9 The comprehensive result (total change in net worth) is the sum of the operating result deficit of $133.9 billion and actuarial revaluation superannuation loss of $5.0 billion offset by $3.2 billion revaluation gains on non-financial assets and equity investments.

Revenue by source

1.10 The Australian Government’s revenue for the year ended 30 June 2020 was $500.3 billion ($507.8 billion for the year ended 30 June 2019). Figure 1.1 provides an analysis of revenue by source from 1 July 2015 to 30 June 2020. Each revenue source as a percentage of total revenue has remained fairly steady with taxation revenue declining from 91.8 per cent in 2015-16 to 89.4 per cent in 2019–20, and sale of goods and services increasing from 4.1 per cent to 6.2 per cent during the same period. Taxation revenue including company tax, individual tax and sales taxes remains the major source of government revenue.

Figure 1.1: Australian Government revenue by source from 2016 to 2020

 

 

Note a: In the 2019–20 financial year the main sources of taxation revenue included individual tax (45.9 per cent), company tax (17.5 per cent), sales taxes (13.4 per cent), excise duty revenue (4.6 per cent), and customs duty revenue (3.9 per cent).

Note b: Sales of goods and services include revenue received from the provision of regulatory services, rental income, sale of electricity by Snowy Hydro Limited, revenue from postal services and broadband network revenue.

Source: ANAO analysis of CFS from 2016 to 2020.

1.11 The expenses of the Australian Government of $600.0 billion for the year ended 30 June 2020 were funded by $500.3 billion of revenue and approximately $99.7 billion borrowings. The additional borrowings, representing 16.6 per cent of total expenses, was applied to fund expenses resulting from the various stimulus packages in response to COVID-19. Borrowings are expected to continue to increase through the forward estimates. Expenses for the year ended 30 June 2019 were fully funded by revenue.

Classification of expenses by the functions of Government

1.12 The functional classification of expenses shows the total accrual outlays according to the primary purpose the Australian Government aims to achieve. Figure 1.2 provides an analysis of expenses by function from 1 July 2015 to 30 June 2020. As a percentage of total expenses, each of the functions has remained fairly stable except for other economic affairs, which increased from two per cent in the previous four years to 11 per cent in 2019–20. Other economic affairs represents non-standard payments such as tourism promotion and labour market assistance to industry. This function increased significantly in 2019–20 due to the JobKeeper payments and cash flow boost to support businesses impacted by COVID-19 being classified in this category.

Figure 1.2: Proportion of expenses of Government by function from 2016 to 2020

 

 

Note a: Other economic affairs represents non-standard payments including storage, tourism promotion, labour market assistance to industry, industrial relations etc. In 2019–20, the JobKeeper payments and other non-standard Australian Government’s support provided to the various sectors as a result of the impact of the COVID-19 pandemic are included in this category.

Note b: Other expenses include payments to: agriculture, forestry and fishing; fuel and energy; housing and community amenities; mining, manufacturing and construction; public order and safety; and transport and communications.

Source: ANAO analysis of CFS from 2016 to 2020.

Net worth

1.13 The Australian Government’s net worth deficiency increased from $545.2 billion in 2018–19 to a deficiency of $679.9 billion in 2019–20. Figure 1.3 provides an analysis of the movement in net worth from 1 July 2019 to 30 June 2020.

Figure 1.3: Changes in the Australian Government’s net worth from 2019 to 2020

 

 

Source: ANAO analysis of 2019–20 CFS.

1.14 Table 1.2 provides commentary on the main contributors to the change in net worth of the Australian Government identified in Figure 1.3.

Table 1.2: Explanation of key movements in net worth

Source: ANAO analysis of 2019–20 CFS.

1.15 Figure 1.4 illustrates the total liabilities and assets of the Australian Government since 2012–13. Total assets increased by approximately $101.3 billion since 30 June 2019 mainly due to the $57.2 billion purchase of securities from the secondary market by the RBA as part of various monetary policy measures to lower funding cost, and $29.0 billion increase due to asset revaluation and the ‘right-of-use asset’ reflecting the implementation of AASB 16 Leases (AASB 16). Two significant components that impact the Australian Government’s total liabilities are the issue of Government securities, and the value of defined benefit superannuation liabilities. These components are discussed in more detail below.

Figure 1.4: Australian Government’s total assets, total liabilities and net worth, from 2012–13 to 2019–20

 

 

Source: ANAO analysis of 2019–20 CFS.

Government securities

1.16 There has been a steady growth in net debt as a percentage of GDP. Figure 1.5 illustrates the change in the indicators of the net financial positon of the Australian Government since 2008–09 as a per cent of GDP.

Figure 1.5: Australian Government net financial position (as per cent of GDP), from 2008–09 to 2019–20

 

 

Source: ANAO analysis of 2019–20 CFS.

1.17 The level of Government Securities borrowing grew by $106.7 billion in 2019–20. The net interest payments were $18.0 billion in 2018–19 remaining relatively stable compared to $17.4 billion in 2019–20. The low interest rate environment continues to keep the level of net interest payments low, despite the increasing level of net debt.

Superannuation liabilities

1.18 The Australian Government has superannuation liabilities arising from obligations to employees for defined benefit superannuation schemes. Note 9C of the CFS provides information on the nature of these schemes. The total superannuation liability for these schemes was $431 billion as at 30 June 2020 ($416 billion as at 30 June 2019). The significant balances of the reported liability relate to the following schemes that are closed to new members:

• Commonwealth Superannuation Scheme ($94.8 billion);
• Public Sector Superannuation Scheme ($143.9 billion);
• Military Superannuation Benefits Scheme ($134.5 billion); and
• Defence Force Retirement and Death Benefits Scheme ($52.0 billion).

1.19 The primary reason for the increase in the liability is the fall in the discount rate used in valuing the superannuation liability between 30 June 2019 and 30 June 2020. The long term nature of the superannuation liability means that small changes to the discount rate can have a large impact on the liability.

1.20 The Future Fund was established by the Future Fund Act 2006 to strengthen the Australian Government’s long-term financial position through the acquisition of financial assets and investments to assist in the discharge of the Australian Government’s superannuation liabilities.

1.21 The Future Fund Board of Guardians (the Board) is responsible for deciding how to invest the assets of the Future Fund through balancing the risk aspects of each investment mandate to maximise returns.

1.22 Figure 1.6 provides an overview of the balances of the Australian Government superannuation liabilities, the net investment balance of the Future Fund and the target asset level (TAL) from 2011–12 to 2019–20.

Figure 1.6: Total value of Australian Government superannuation liabilities and Future Fund investments, and the target asset level, from 2012–13 to 2019–20

 

 

Source: ANAO analysis of 2019–20 CFS.

1.23 The TAL represents the best estimate of the assets required, together with investment earnings on those assets, which would be sufficient to meet the future unfunded superannuation benefit payments. As such, the discount rate used to calculate the present value of future payments for TAL purposes represents the expected investment return on Future Fund assets. The Australian Government Superannuation liability included in Figure 1.6 reflects the present value of future unfunded superannuation benefits payments discounted using the Commonwealth bond rate, in accordance with Australian Accounting Standards.

1.24 Figure 1.6 shows that the 2019–20 estimate of the TAL is $193.7 billion², which is above the current Future Fund net asset balance of $158.2 billion. The Future Fund Act 2006 permits drawdowns, to fund superannuation payments, from 1 July 2020 or when the balance of the Future Fund equals or exceeds the TAL. However, in 2017, the Government announced it would delay drawdowns from the Future Fund until at least 2026–27.

Government Financing through Loans and Equity

Investments for policy purposes

1.25 The Australian Government reports on a number of fiscal aggregates including net operating balance and underlying cash. These aggregates exclude cash or accounting movements that are of an investment or financing nature, in particular, investments made for policy purposes and the fair value losses on these investments.

1.26 A number of investments made for policy purposes have elements of economic and social benefits in addition to providing commercial returns. There may be some benefits in segregating the commercial and non-commercial portions of the investments to better reflect the implications on key fiscal aggregates. The Parliamentary Budget Office in Report no.01/2020 examined trends in the use of alternative financing arrangements and explained how these arrangements relate to the Commonwealth budget and identified possible enhancements to budget reporting to support public understanding.³

1.27 Two key items included in investments made for policy purposes are investments in public corporations and concessional loans.

Investment in public corporations (General Government Sector)

1.28 The Government has increased its investments in Commonwealth controlled entities. Consistent with reporting requirements, these investments do not impact net operating balance or underlying cash, as described in paragraph 1.25 above.

1.29 The majority of these investments are in entities that provide a positive real return to the Commonwealth and are therefore classified as equity injections.⁴ The impact of the operations are not reflected in underlying cash unless dividends are received from the entities. The ongoing valuations of these entities are reflected in net worth. If the valuation of these entities deteriorates (for example as a result of accumulating losses or the valuation of future cash flows associated with assets procured through equity injections being less than their purchase costs), the deterioration in the position will be reflected in the General Government Sector’s net worth but not impact on the underlying cash even if the deterioration was a predictable result of a non-commercial policy decision. Table 1.3 shows investments made in Commonwealth entities where the equity contributed is greater than $300.0 million (excluding Snowy Hydro Limited which was purchased from the NSW and Victorian State Governments). The itemised list at Table 1.3 makes up 34 per cent of equity investments in public corporations. Investments in new or start up corporations are usually valued at their net assets until they exit the start-up phase, which can be a number of years. This may result in a value temporarily lower than the capital contributed as the capital is applied to the operations of the new business.

Table 1.3: Commonwealth Entities contributed equity, net assets and GGS fair value

Note a: The differential in these values is due to the land transferred held under finance lease by WSA Co Pty at nil value. The land has a value for GGS purposes.

Note b: Included as significant contributions are due in coming years.

Source: ANAO analysis of 2019–20 CFS and entity financial statements.

Concessional loans

1.30 There has been a continual growth in loans provided by Government, with a large proportion of these loans being concessional. Concessional loans are loans provided on favourable terms, for example, the interest rate may be below the current market rate for loans of similar risk.

1.31 The Higher Education Loan Program (HELP) is the largest Australian Government concessional loan program which is recorded by the Department of Education, Skills and Employment but is managed by the Australian Taxation Office.

1.32 HELP provides financial assistance to students to remove up-front cost barriers to tertiary education through income contingent loans. These loans are indexed to CPI and repayments are linked to the ability to pay based on income thresholds.

1.33 When HELP loans are issued, they are recorded as an asset for accounting purposes at the amount the Government expects to be repaid. The amount not expected to be repaid is classified under ‘Other economic flows’ in the Operating Statement. Other economic flows mainly include revaluations of asset and liabilities. Under AASB 1049 Whole of Government and General Government Sector Financial Reporting, other economic flows are included in some, but not all, fiscal aggregates reported in the CFS. In particular, they are not included in net operating balance and underlying cash. HELP loan amounts not expected to be repaid are not included in these two key fiscal aggregates.

1.34 The amounts not expected to be repaid (due to being income contingent) on new student loans each financial year since 2015–16 are provided in Table 1.4.

Table 1.4: Amounts not expected to be repaid on new HELP loans

Source: Australian Government Actuary reports.

1.35 The policy of making HELP and other student loans income contingent has a significant cost to the Australian Government. The fair value of student loans at 30 June 2020 was $50.6 billion compared to the nominal value of the loans of $69.5 billion. The difference between the nominal value and the fair value include the $17.6 billion that is not expected to be repaid and the impact of the yield curve movement based on 2019–20 actuarial assessment.⁵ The $17.6 billion reflects the accumulated cost to the Government of the making the loans and is not being reflected in the key fiscal aggregates of underlying cash and net operating balance.

1.36 Since 2016–17, three new corporate Commonwealth entities have been established with the purpose of issuing concessional loans. These are in addition to the HELP loans managed by the Australian Taxation Office and other key Commonwealth entities providing loans and debt management being:

• Export Finance Australia (EFA) (formerly Export Finance Investment Corporation) was established in its current form as a separate Commonwealth Entity in 1991. EFA has well-recognised expertise and a track record in providing and managing a significant loan portfolio in pursuit of its objectives to support Australian based companies seeking to grow internationally and overseas infrastructure development.
• Australian Office of Financial Management (AOFM) was established in 1999 and undertakes debt management activities including the issuance of Government securities, such as, Treasury Bonds and Treasury Indexed Bonds. AOFM has extensive experience in the issuance, management and administration of debt

1.37 The new entities are the National Housing Financing and Investment Corporation (NHFIC), established 30 June 2018, the Regional Investment Corporation (RIC) established 8 March 2018 and the Northern Australia Infrastructure Facility (NAIF) established 1 July 2016. NHFIC provides finance to the community housing sector and uses EFA to provide loan management services and other administrative support. In the year ended 30 June 2020, NHFIC raised $877 million through a bond issue to fund the significant portion of the loans issued. NHFIC reports the loan transactions in its financial statements and is exposed to the counterparty risks.

1.38 In contrast the NAIF and the RIC do not report loan balances and the primary objective of these entities is to assess loans for infrastructure projects and farm business loans which the Departments of Industry, Science, Energy and Resources and the Department of Agriculture, Water and the Environment respectively enter into. The loans are reported in these departments’ financial statements. Due to the structure of the arrangements with each department, neither NAIF nor RIC is exposed to the counterparty risk arising from the loans. The RIC engages Bendigo Bank as a third party provider to provide loan management services. The NAIF utilises the services of Export Finance Australia to provide back office administrative support.

1.39 During the 2019–20 financial year, these entities have either issued or recommended loans as set out in Table 1.5 below.

Table 1.5: Loan transactions during 2019–20

Source: ANAO analysis provided by entities and 2019–20 annual reports.

1.40 There is a significant overhead cost associated with establishing and maintaining a commonwealth entity irrespective of the size of that entity. For the period ended 30 June 2020, the reported number of staff, Key Management Personnel (KMP) and board members for each of the entities discussed above is set out in Table 1.6 including the total employee expenses cost and reported cost of KMP.

Table 1.6: 2019–20 summary of expenditure relating to employees, KMP and board members

Note a: Board members are included in the number of KMP.

Source: ANAO analysis of 2019–20 annual reports.

Table 1.7: Definitions of terms used

Source: Australian Bureau of Statistics (2015). Australian System of Government Finance Statistics: Concepts, Sources and Methods; AASB 101 Preparation of Financial Statements, paragraph 5 and 7; AASB 1049 Whole of Government and General Government Sector Financial Reporting, Appendix A; and Reserve Bank of Australia (2017). Glossary RBA. [online] Available at: https://www.rba.gov.au/glossary/ [Accessed 23 November 2020].

Introduction

2.1 The Auditor-General is required to complete the financial statements audits of all Australian Government entities and controlled subsidiaries on an annual basis.⁶ This chapter summarises the results of the 2019–20 financial statements audits and provides commentary on specific topics which relate to the governance and administration of entities.

Summary of 2019–20 auditors’ reports

2.2 A comparison of the number and type of auditors’ reports issued by the Auditor-General and his delegates in 2018–19 and 2019–20 (as at 24 November 2020), including the Consolidated Financial Statements (CFS) is included at Table 2.1. Additional detail relating to the financial reporting frameworks applicable to the Australian Government, and the form and content of auditors’ reports is outlined in appendices 3 and 4.

Table 2.1: Summary of auditors’ reports issued and outstanding as at 24 November 2020

Note a: Australian Nuclear Science and Technology Organisation, Australian Nuclear Science and Technology Nuclear Medicine Pty Ltd, Indigenous Land and Sea Corporation, Rural Industries Research and Development Corporation and Voyages Indigenous Tourism Australia Pty Ltd.

Note b: National Australia Day Council. For further details refer to chapter five paragraph 5.12.49.

Note c: As at 24 November 2020 the 2019–20 the financial statements had not been finalised for the following entities: Darwin Hotel Partnership; Gagudju Crocodile Hotel Trust; Gagudju Lodge Cooinda Trust; Ikara Wilpena Enterprises Pty Ltd; Ikara Wilpena Holdings Trust; Kakadu Tourism (GCH) Pty Ltd; Kakadu Tourism (GLC) Pty Ltd; North Australia Aboriginal Corporation; Northern Australian Aboriginal Charitable Trust; Northern Land Council; Tennant Creek Land Holding Trust; Tjapukai Aboriginal Cultural Park Partnership and Wilpena Pound Aerodrome Services Pty Ltd.

Note d: As at 29 November 2019 the 2018–19 financial statements had not been finalised for the following entities: Gagudju Crocodile Hotel Trust; Gagudju Lodge Cooinda Trust; IBA Tourism Asset Management Pty Ltd; Kakadu Tourism (GCH) Pty Ltd; Kakadu Tourism (GLC) Pty Ltd; Northam Solar Project Partnership; Northern Land Council; and Tjapukai Aboriginal Cultural Park Partnership.

Note e: Subsequent to 30 June 2019, it was identified that the Northern Land Council has two subsidiaries which are required to be audited by the ANAO for the year ended 2018–19 and prior year(s). These entities are the North Australia Aboriginal Corporation and the Northern Australian Aboriginal Charitable Trust. As at 24 November 2020, the 2019–20 and prior years audits are still in progress.

Source: 2018–19 and 2019–20 ANAO auditors’ reports.

Internal control environment

2.3 The ANAO uses the framework in ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment to consider the impact of elements of an entity’s internal controls supporting the preparation of financial statements. This approach provides a basis for designing and implementing responses to the assessed risk of material misstatement. Figure 2.1 outlines these elements.

Figure 2.1: Elements of entity internal controls

 

 

Source: ASA 315 Identifying and assessing the risk of material misstatement through understanding the entity and its environment, paragraph A59.

2.4 In assessing the effectiveness of an entity’s control environment to support the preparation of financial statements, the ANAO examines aspects of entities’ governance structures. The ANAO considers whether management has established frameworks and processes that promote positive attitudes, awareness and actions concerning the entity’s internal controls and the importance of these to the entity. The main elements reviewed include: governance structures relevant to the preparation of the financial statements; audit committee and assurance arrangements; and systems of authorisation, recording and procedures. For information relating to the assessment of IT controls and cyber security risks, refer to paragraphs 2.48 to 2.59.

2.5 An effective internal control framework provides a level of assurance that entities are able to prepare financial statements that are free from material misstatement.

2.6 Since its emergence in late 2019, coronavirus disease 2019 (COVID-19) has become a global pandemic impacting on human health and national economies. On 21 January 2020 the Australian Government listed COVID-19 as a disease of pandemic potential under the Biosecurity Act 2015. From February 2020, the Australian Government commenced the introduction of a range of policy measures in response to the emergence of COVID-19.

2.7 Under the Public Governance Performance and Accountability Act 2013 (PGPA Act), the accountable authority must establish and maintain appropriate systems of risk oversight, management and internal control for the entity. The Commonwealth Risk Management Policy sets out the government’s expectations for Commonwealth entities in undertaking the business of government. Risk is defined as the ‘effect of uncertainty on objectives’ and risk management as the ‘coordinated activities to direct and control an organisation with regard to risk’.

2.8 Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities noted that interim controls testing was undertaken, for the 24 entities considered in that report, before decisions on the implementation of the COVID-19 measures were made and that entities should consider whether appropriate controls have been established for COVID-19 activities.

2.9 As part of assessing the effectiveness of an entity’s control environment, the ANAO considered the impact and response to the COVID-19 pandemic for the operations and financial statement preparation processes, including whether entity’s had reconsidered their risks and if these risks were considered by its audit committee. All entities reconsidered risk as part of their response to the COVID-19 pandemic, with 24 entities changing their risk appetite.

2.10 Where an internal audit function has been established it can play an important role in providing assurance to the accountable authority that the internal control framework is operating effectively. Entities are encouraged to identify opportunities to leverage internal audit coverage as a means of providing increased assurance to accountable authorities to support their authorisation on the entity’s financial statements. The ANAO noted eight entities reduced or deferred internal audit activity to reflect the shift in priorities and risk profile from business as usual in response to the COVID-19 pandemic.⁷

2.11 For the majority of entities, at the completion of the final audits, key elements of internal control were operating effectively, including re-assessment of risks arising from the COVID-19 pandemic, to provide reasonable assurance that the entities were able to prepare financial statements that were free from material misstatement.

2.12 For 15 entities, except for moderate finding/s outlined in chapter five, the key elements of internal control were operating effectively to support the preparation of financial statements that are free from material misstatement.⁸ For two entities significant findings were identified which reduced the level of confidence that could be placed on key elements of internal control and that financial statements can be prepared free from material misstatement.⁹

Quality and timeliness of financial statements preparation

2.13 The primary purpose of financial statements is to provide relevant and reliable information to users about a reporting entity’s financial position. In the public sector, the users of financial statements include ministers, the Parliament and the community.

2.14 The ANAO applies these objectives in undertaking financial statements audits and considers areas that may give rise to risks of non-compliance with mandatory reporting requirements, or risks relating to effectiveness of internal control when planning and performing the audit. Financial statements preparation is often a complex task, involving compliance with a large number of requirements established by Australian accounting standards and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the FRRs).

2.15 In order to provide relevant and reliable financial information to the users, entities should prepare quality financial statements in a timely manner to support entities to meet legislative reporting obligations including the tabling of annual reports. The preparation of quality financial statements will be evidenced by adherence to a well-defined financial statements preparation timetable with minimal adjustments required to their financial statements throughout the audit process.

2.16 Each year the ANAO reports on the quality of financial statements preparation to entities. Where findings are raised relating to weaknesses in controls and processes supporting financial statements preparation they are incorporated within the compliance and quality assurance category in the audit findings section of this chapter. A review of the findings relating to weaknesses in processes supporting financial statements preparation has been performed across the last four years.

2.17 At the completion of the 2019–20 financial statements audit, the ANAO reported no significant, three moderate and 11 minor findings relating to processes supporting financial statements preparation. This a decrease from 2018–19 where one significant, four moderate and 14 minor findings were reported to entities.

2.18 In 2019–20, the ANAO also assessed the timeliness of financial statements preparation. Timeliness in preparation was assessed by comparing the date of delivery of the financial statements to agreed timeframes. The timeframe was established by entities and agreed with audit teams for the delivery of financial statements.

2.19 Timeliness in financial statements preparation declined compared to the prior year. Delivery of financial statements in line with the agreed timeframes was achieved by 64 per cent of entities (2018–19: 69 per cent), with a further 25 per cent delivered within one week (2018–19: 18 per cent). The remaining 11 per cent provided their financial statements within 19 days on average of the agreed timeframe (2018–19: 13 days).

2.20 The quality of financial statements preparation was assessed by considering the number and value of audit differences identified. Throughout the financial statements audit process, audit differences other than those considered trivial are communicated to entities. Entities are encouraged to adjust all audit differences.

2.21 The total number of audit differences in 2019–20 (adjusted and unadjusted) decreased by 14 per cent from 2018–19. There was a decrease in the number of unadjusted audit differences in 2019–20, with 98 unadjusted audit differences reported (2018–19: 120). Of these unadjusted differences, 61 related to material entities (2018–19: 52). With the exception of the National Australia Day Council, the unadjusted differences, individually and in aggregate, did not result in a material misstatement to the financial statements of the audited entities.

2.22 Table 2.2 shows that while total unadjusted audit differences decreased compared to 2018–19, the net value impact has increased in 2019–20 for revenue and expenses. This increase is primarily attributed to the unadjusted audit differences for the Department of Defence.

2.23 Of the unadjusted differences identified as a result of the 2019–20 financial statements audits, ten adjustments relating to five entities have been made at the CFS level.¹⁰ The impact of the unadjusted differences was $937.4 million on revenue; $875.4 million on expenses; $86.0 million on assets; $29.0 million on liabilities; and $53.0 million on equity.

Table 2.2: Total value of unadjusted audit differences ($ million)

Source: ANAO analysis

2.24 While the ANAO reported a decrease in findings related to processes supporting financial statements preparation, there was a reduction in timeliness of delivery of draft financial statements in line with entity financial statements project plans. Along with the increase in total value of audit differences reported to entities in 2019–20 compared to 2018–19, this indicates there is still an opportunity to improve quality assurance frameworks over financial statements process, noting that the reduced number of findings indicate some improvements have been made. The ANAO recommends that entities continue to enhance their quality assurance frameworks, to ensure that significant accounting policies, estimates and adjustments underpinning financial statements are reviewed as early as possible in the preparation process. In their assurance role, audit committees are encouraged to actively support management through the critical evaluation of accounting papers and holding entities to account for delivering on agreed timetables.

Implementation of AASB 16 Leases

2.25 The revised leasing standard, AASB 16, is effective for financial years commencing on or after 1 January 2019; meaning it impacted entities in the 2019–20 financial year. AASB 16 significantly increases the recognition and disclosure of leases by lessees with the majority of leases currently treated as operating leases recognised on the balance sheet. The net impact on the balance sheet was limited, as the right-of-use asset and lease liability largely offset. In terms of profit or loss impact (rather than the current annual rent expense over the term of the lease) two expenses were recognised — interest on the lease liability and amortisation of the right-of-use asset. The effect of AASB 16 ‘front-loads’ the recognition of expense, rather than recognising it on a straight-line basis.

2.26 The introduction of the AASB 16 was announced in early 2016 to allow entities sufficient time to prepare for the transition. To assist entities in the adoption of AASB 16, the Department of Finance updated the Financial Reporting Rule (FRR), Resource Management Guide 125 Commonwealth Entities Financial Statements Guide (RMG 125) and Resource Management Guide 110 AASB 16 Leases Implementation (RMG 110). These resources outlined the Commonwealth’s position on the options available for the transitioning and adoption of the new standard. The Department of Finance also provided entities with worked examples covering common leasing arrangements for entities to follow.

2.27 The Department of Finance has published a Better Practice Guide (the guide) to provide direction to all entities with financial statements preparation. Section 7.7 of the guide notes accounting papers as an important tool to assist and plan for complex matters including changes to accounting standards. The benefit of preparing accounting papers includes allowing entities to document key decisions and keep stakeholders apprised of how they affect financial statements. As AASB 16 was a revised accounting standard for the 2019–20 financial year that affected many entities, quality accounting papers should have been prepared to document the key judgements made by management as a part of the financial statements preparation process.

2.28 For the 2019–20 financial year, 67 per cent of entities were materially affected by AASB 16 with $29.9 billion of right-of-use assets and $32.5 billion of lease liabilities recognised at the end of 2019–20 financial year.¹¹ Eighty nine per cent of the materially affected entities prepared accounting papers to assist in the transition as a part of the financial statement preparation process. The Australian Trade and Investments Commission did not prepare an accounting paper of a sufficient standard to support quality financial statements with issues noted around timeliness and completeness of information provided.¹²

2.29 The quality of the implementation of AASB 16 was assessed by considering the number of audit differences identified in relation to AASB 16. The total number of audit differences was 41 (27 adjusted and 14 unadjusted). The total audit differences had a net impact on assets of $41.0 million (0.002 per cent of CFS value) and on liabilities of $53.0 million (0.002 per cent of CFS value). The low number and dollar value of audit differences indicates entities were effective in the implementation of AASB 16.

Timeliness of financial reporting

2.30 The finalisation of financial statements preparation and audit is marked by the signing of financial statements and associated auditor’s report.

2.31 Figure 2.2 shows that the percentage of entities with financial statements and the associated auditor’s report signed within two months of the reporting year end has remained relatively consistent between 2018–19 and 2019–20. Seventy-seven per cent of financial statements were signed and associated auditor’s reports issued, within three months of year-end. The ANAO issued 91 per cent of auditor’s reports within two business days of the signing of the financial statements by the accountable authority (2018–19: 95 per cent).

Figure 2.2: Timeframes for auditor’s report signing from the end of financial year

 

 

Source: ANAO data.

2.32 Annual reports inform the Parliament, the community and other stakeholders about the performance of entities. The publication of the annual report containing the audited financial statements is a key means to meet accountability and legislative obligations. Of the 246 mandated financial statements audits, 186 are required to present annual reports to the responsible minister under the Public Governance, Performance and Accountability Act 2013.¹³

2.33 Annual reports are approved by the entity’s accountable authority before being provided to the minister and tabled in Parliament. The Resource Management Guide 135 Annual report for non-corporate Commonwealth entities (RMG 135) section 46 states that annual reports are to be provided to the relevant minister by the 15th day of the fourth month after the end of the reporting period.

2.34 Figure 2.3 shows the time in days between the issue of the auditor’s report to the:

• approval of the annual report by the accountable authority; and
• tabling of the annual report in Parliament.

Figure 2.3: Timeframe for tabling 2019–20 annual reports from issuance of auditor’s report

 

 

Source: ANAO analysis.

2.35 The analysis shows, that accountable authorities approved 58 per cent of annual reports within 10 days of the issue of the auditor’s report (2018–19: 60 per cent), with an overall average of 13 days (2018–19: 12 days). The average days between the accountable authority’s approval of the annual report and tabling in Parliament was 28 days (2018–19: 28 days).

2.36 Thirty-five per cent tabled within 30 calendar days from the issue of the auditor’s report (2018–19: 29 per cent). The tabling of annual reports in Parliament occurred on average 40 days after the auditor’s report was issued (2018–19: 39 days). There are 14 entities that are required to table an annual report for 2019–20 which have not done so, as at 24 November 2020.¹⁴

2.37 Annual reports should be tabled in Parliament to allow sufficient time for review before Senate budget estimates hearings.¹⁵ RMG 135 section 21 indicates that it is best practice for annual reports to be tabled before supplementary budget estimates hearings if they occur before 31 October.

Figure 2.4: 2019–20 annual report tabling date in relation to Senate budget estimates hearing, as at 24 November 2020

 

 

Note: The remaining eight per cent relate to annual reports yet to be tabled in Parliament.

Source: ANAO analysis.

2.38 Figure 2.4 shows that, in line with best practice, 62 per cent of annual reports were tabled before the date of the 2019–20 budget estimates hearing date (2018–19: 76 per cent). A further 16 per cent tabled on the date of the portfolio’s hearing (2018–19: four per cent). There were eight material entities across five portfolios which either tabled annual reports after the portfolio’s 2020–21 Senate budget estimates hearing (2018–19: three) or have not tabled annual as at 24 November 2020. Table 2.3 includes further details about the timing of 2019–20 annual reports for material entities that missed Senate budget estimate hearings.

2.39 The provisions of subsections 34C(4) to (7) of the Acts Interpretation Act 1901 allows the accountable authority to apply for an extension if it is not reasonable possible to provide the annual report within the timeframe required under the PGPA Act. Where accountable authorities apply for an extension this is required to be approved by the relevant Minister. In 2019–20, three entities across three portfolios were approved extensions to table its annual report and therefore the annual report was not tabled prior to the senate estimates date.¹⁶

Table 2.3: Annual reports tabled after the portfolio’s Senate budget estimate hearing for material entities, as at 24 November 2020

 : annual report not approved as at 24 November 2020

 : annual report not tabled as at 24 November 2020

Note a: The date of the accountable authority’s approval of the annual report is taken as either the date on the transmittal letter or the date the board approved the annual report. 

Note b: This date is the first appearance for the portfolio at the 2020–21 Senate budget estimates hearing.

Note c: Coal Mining Industry (Long Service Leave Funding) Corporation, the Department of Health and the Department of the Treasury received an extension for tabling of 2019–20 annual reports.

Note d: The Department of Health tabled their annual report after the portfolio supplementary budget estimate hearing in 2018–19.

Source: ANAO analysis

Key audit matters

2.40 ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report (ASA 701) has been applicable since 2016–17. While ASA 701 only requires Key Audit Matters (KAM) reporting for listed entities, the Auditor-General considers including KAM to be good practice for financial statements auditing. The Auditor-General adopted inclusion of KAM in 2016–17 and this has continued in 2019–20 for the 24 entities included in Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities and also in the Consolidated Financial Statements (CFS) from 2017–18.

2.41 In addition to the CFS, the following entities include KAM:

• Australian Office of Financial Management;
• Australian Postal Corporation;
• Australian Taxation Office;
• Departments of: Agriculture, Water and the Environment; Defence; Education, Skills and Employment; Finance; Foreign Affairs and Trade; Health; Home Affairs; Industry, Science, Energy and Resources; Infrastructure, Transport, Regional Development and Communications; Parliamentary Services; the Prime Minister and Cabinet; Social Services; the Treasury; and Veterans’ Affairs;
• Future Fund Management Agency and the Board of Guardians;
• National Disability Insurance Scheme Launch Transition Agency;
• National Indigenous Australians Agency;
• NBN Co Limited;
• Reserve Bank of Australia; and
• Services Australia.¹⁷

2.42 The purpose of communicating KAM is to provide greater transparency about the audit that was performed. Communicating KAM helps users of financial statements better understand those matters that, in the auditor’s professional judgement, were of the most significance in the audit of the financial statements. The audit opinion is made for the financial statements as a whole. Accordingly, the description of KAM does not provide a separate conclusion on the matter being described, nor does it imply that the matter has been appropriately resolved in forming the overall opinion.

2.43 In 2019–20, a total of 56 KAM were included across the 24(2018–19: 26) entities (2018–19: 60).¹⁸ Except for the audit of the Attorney-General’s Department, which did not give rise to any KAM being included in its auditor’s report, the number of KAM per entity ranged from one to five (2018–19: one to four). A number of factors were considered in determining KAM including reliance on third parties for data and balances that are underpinned by significant judgements and assumptions.

2.44 The majority of KAM in 2019–20 related to the valuation assertion for assets and liabilities such as:

• loans and other receivables;
• property, plant and equipment;
• investments;
• intangibles;
• provisions; and
• concessional loans.

2.45 Other KAM included: completeness and accuracy of expenses relating to subsidies and personal benefit, and other payments and completeness and accuracy of revenue relating taxation, royalty and other revenue.

2.46 The following three new KAM were included in 2019–20 as a result of risks identified relating to the COVID-19 pandemic:

• the valuation of administered investments held by the Department of the Prime Minister and Cabinet as a result of impact of the COVID-19 pandemic on the tourism industry and the loans provided by Indigenous Business Australia;
• the eligibility assessments and completeness of subsidy expenses in the Australian Taxation Office financial statements as a result of the implementation of the stimulus measures administered in connection with JobKeeper and the Cash Flow Boost payments; and
• the existence and completeness of inventories in the National Medical Stockpile maintained by the Department of Health.

2.47 In addition to the new KAM, five existing KAM were updated to include additional audit procedures required to address revised risks resulting from the COVID-19 pandemic.¹⁹ The ANAO also included KAM in the auditor’s report for the CFS. There were seven KAM identified for the CFS which have been reported in Table 1.1.

IT Controls and Cyber Security Risks

2.48 Cyber security remains a strategic priority for the Australian Government. The 2020 Australian Cyber Security Strategy highlights the importance of protecting Australians online, especially during the COVID-19 pandemic.²⁰

2.49 The Australian Cyber Security Centre (ACSC) provides advice and information on how Australians can protect themselves online. ACSC has stated that since March 2020, there has been an increase in COVID-19 pandemic themed malicious cyber activity across Australia.²¹ The ACSC has published guidance to inform users of the risks associated with using remote access technologies.²²

2.50 Figure 2.5 provides the ANAO’s analysis of changes to remote working arrangements and information technology (IT) general controls within entities as part of their response to the COVID-19 pandemic. As part of the response to the COVID-19 pandemic 186 entities implemented some format of remote working. The majority of entities assessed their existing IT general controls as being appropriate to support remote working arrangements, with only 15 of the 186 entities needing changes to IT general controls.

Figure 2.5: Remote working and changes to IT general controls

 

 

Source: ANAO data.

2.51 Assessments of exposure to cybersecurity intrusions during the COVID-19 pandemic was performed by 105 entities. Of the 105 entities, 74 did not identify any additional threats due to the COVID-19 pandemic, and the remaining 31 entities did identify at least one new threat as part of this assessment. The most common threat identified was related to phishing scams. Forty five of the 222 entities reported an increase in the volume or frequency of cyber intrusion attempts since March 2020. Figure 2.6 summarises the analysis of cyber intrusion assessments.

Figure 2.6: Reassessment of exposure to cyber intrusions

 

 

Source: ANAO data.

2.52 Although there was an increase in the volume of cyber intrusion attempts since March 2020, the ANAO did not note any significant progress against the Protective Security Policy Framework (PSPF) Policy 10 requirements within material entities since the Interim Phase assessment. These entities were still finding it challenging to implement the necessary mitigation strategies, with some having particular difficulties in managing privileged user access.

2.53 The ANAO extended its review of the IT control environment of 19 entities, including all departments of state and a number of major Australian government entities. The 19 entities were selected on the basis of their overall IT risk and complexity and their contribution to the CFS. This selection was used to determine whether cyber security risks arising from the COVID-19 pandemic had been managed to reduce the impact on the application controls relied upon in the audit of financial statements.

2.54 The ANAO performed analysis on the following areas highlighted by ACSC, see Figure 2.7:

1. securing remote access;
2. management of system patches;
3. user education and awareness; and
4. logging and monitoring of security events.

Figure 2.7: Implementation of controls in response to the COVID-19 pandemic

 

 

Source: ANAO data.

2.55 As per Figure 2.7, remote access was secure for 16 of the entities analysed, with appropriate multi-factor authentication (MFA) and passphrase controls being implemented. MFA reduces the risk of external attackers using stolen usernames and passwords to gain unauthorised access to personal and financial systems and data. Three entities did not use MFA to secure remote access, with one of the three entities stating that MFA was not appropriate for its business environment as it impeded on the level of accessibility to its systems, specifically for staff with accessibility issues. The three entities had decided to rely on other security controls to mitigate the risks associated with less secure implementations of remote access.

2.56 Systems should be appropriately patched to prevent external attackers from exploiting known vulnerabilities to gain unauthorised system access. Of the 19 entities selected, 16 entities were managing patches to its systems within their defined key performance indicators (KPIs). The remaining three entities reported not being able to meet their KPIs as they had changed how they delivered their desktop patches due to the remote working environments.

2.57 User education and guidance to support remote working was in place for 17 entities to ensure staff and other stakeholders were aware of the increased cyber security risk in relation to remote working. This reduces the chances of a successful phishing attack by external attackers. However, only four entities reported that they measured the outcomes from these campaigns. These four entities reported using simulated phishing attacks to assess whether their staff were capable of identifying phishing emails; and website analytics to assess whether the published guidance was being viewed by staff. One of the 19 entities informed the ANAO that it had not performed any user education for remote working in relation to its response to the COVID-19 pandemic. During the preparation of the report, this entity was still in the process of developing training material that was due to be delivered in August 2020.

2.58 Eight entities stated they had broadened their event logging to better monitor cyber threats due to the COVID-19 pandemic. These changes can be used to better detect and prevent malicious activity by taking into account remote working conditions of their staff. One of the eight entities informed ANAO that it added event logging to also ensure that social distancing requirements were maintained. This was done by monitoring staffing levels to ensure buildings were not over occupied.

2.59 Overall, the majority of entities reported that existing IT general controls could support their respective remote working arrangements, with only a few entities identifying new cyber threats. Further, the majority of entities had implemented or updated controls in the risk areas highlighted by ACSC. The broader management of cyber threats assists in reducing the impact on the application controls relied upon in the preparation and audit of financial statements.

Financial sustainability of material entities

2.60 Integral to an audit is an understanding of an entity and its environment, including an entity’s financial sustainability. Financial sustainability measures the ability of an entity to manage its financial resources so it can meet present and future spending commitments. This can provide an indication of financial management issues or can point to an increased risk that entities may require additional government funding.

2.61 In 2018–19, the Department of Finance established a portal for capturing and reporting annual reports for all Commonwealth entities and Companies.²³ This portal allows information to be captured and tagged to enable users to compare and contrast financial results and mandatory annual reporting requirements across all entities and includes the following four ratios:

• Total Liabilities to Total Assets ratio — indicates the level of ownership of the entity’s assets, but can also be used to gain an understanding of the entity’s net equity of the entity.
• Financial Assets to Total Liabilities ratio — indicates the extent to which an entity’s liabilities can be covered by its financial assets.
• Current Ratio — indicates whether an entity’s current assets are greater than its current liabilities. It indicates whether the entity is likely to be able to pay its short term liabilities as they fall due.
• Capital Turnover Ratio — indicates whether an entity is replacing its assets at a sustainable rate.

2.62 The Department of Finance has not developed and communicated guidance to assist users in assessing whether the ratios indicate strong or weak financial performance in the context of the government sector.²⁴ Consistent with 2018–19, in the absence of government guidance, the ANAO has developed parameters based on generally accepted concepts of financial sustainability and applied these to the operating results and balance sheets of the 62 material entities.²⁵ These parameters are described in Table 2.4 and Table 2.5 below. In addition, there are a number of adjustments made to ratio inputs to achieve a more meaningful indicator as noted below.

Analysis of operating results

2.63 A key measure of an entity’s financial management is its operating result for the year. Although the operating result is not the sole measure of performance of a public sector entity, a history of large deficits or surpluses in a not-for-profit Commonwealth entity could suggest the need for additional or refocused funding, elimination of non-value adding costs, and/or improved financial management.

2.64 Similarly in the case of for-profit entities and those with quasi-commercial operations, there is an expectation that financial management focuses on meeting expected returns.²⁶ As a result, any entity in this category averaging a large deficit should be considered more closely.

2.65 The ANAO analysed the operating results of all material entities over a five year period from 2015–16 to 2019–20. The analysis is based on reported surpluses or deficits after adjusting for unfunded expenses, where relevant, highlighting the full cost of operations.²⁷ Of the 62 material entities, 38 were not-for-profit and 24 were corporate or commonwealth companies or not-for-profit entities which have quasi-commercial operations or departmental functions operating on a for-profit basis.

2.66 For the purposes of this analysis, material entities are grouped into three operating result categories as part of this analysis, outlined in Table 2.4.

Table 2.4: Operating result category

Source: ANAO developed parameters.

2.67 Figure 2.8 demonstrates 34 per cent of material not-for-profit (2018–19: 43 per cent) and eight per cent of for profit/quasi entities (2018–19: 12 per cent) were classified as achieving small deficits or surpluses and managing within their breakeven mandate.

Figure 2.8: Operating result analysis

 

 

Source: ANAO analysis of material entities’ operating results.

2.68 Forty two per cent of not-for-profit entities (2018–19: 44 per cent) and sixty-three per cent of for-profit/quasi-commercial entities (2018–19: 67 per cent) recorded large average surpluses. Twenty seven per cent of not-for profit (2018–19: 13 per cent) and twenty-nine per cent of for-profit/quasi (2018–19: 21 per cent) entities have averaged large deficits. The following discussion focuses on the common drivers for these entities’ large average surpluses and large average deficits.

Large average deficit

2.69 The following seven for-profit/ quasi-commercial entities recorded a large average deficit during the period: Australian Naval Infrastructure Pty; Australian Rail Track Corporation; Coal Mining Industry (Long Service Leave Funding) Corporation; Moorebank Intermodal Company Limited; National Housing Finance and Investment Corporation; NBN Co. Limited; and WSA Co Ltd. Of these entities:

• four recorded large average deficits, consistent to the previous financial year due to being in the build phase of large infrastructure projects, requiring significant investment which has led to their operating losses, they were: Australian Naval Infrastructure Pty Ltd; Moorebank Intermodal Company Limited; NBN Co Limited; and WSA Co Ltd.²⁸
• the Australian Rail Track Corporation (ARTC) large average deficit related to the increase in impairment expenses recognised for property, plant and equipment (including rail infrastructure) assets. These expenses increased in 2018–19 and 2019–20 as a result of impairments recognised on the assets being constructed for the Inland Rail network and on rail infrastructure assets in the Interstate and Hunter Valley rail networks. The impairment was a result of decreases in the expected income for these assets on which the fair value is calculated.
• the National Housing Finance and Investment Corporation large average deficit is a result of the accounting treatment for the increase in concessional loans to eligible clients (2019–20 to $1.2 billion; 2018–19: $308 million) and costs associated with the establishment of the agency.
• the Coal Mining Industry (Long Service Leave Funding) Corporation moved from the large average surplus category in 2018–19 due to an 88 per cent decrease in revenue from its investment portfolio in 2019–20 (2018–19: $127.2 million; 2019–20: $15.1 million).

2.70 The following nine not-for-profit entities also recorded a large average deficit during the period: the Australian Broadcasting Corporation; Australian Federal Police; Australian Prudential Regulation Authority; National Indigenous Australians Agency; National Capital Authority; and the Departments of Industry, Science, Energy and Resources, Parliamentary Services, the Prime Minister and Cabinet, and Veterans’ Affairs.

2.71 One off factors that occurred in a prior year, and resulted in a significant deficit in that year have continued to have an effect on the five year average up to 2019–20 for two entities. In 2017–18, the operating result of the Australian Broadcasting Corporation was affected by the initial recognition of a building maintenance provision of $30.7 million as a result of a Building Code of Australia Fire Safety Standards review. The operating loss in 2017–18 for the National Capital Authority, largely related to works on the National Police Memorial, where insurance funds were received (and recognised in the financial statements) in 2015–16 but the majority of the work was undertaken in 2017–18.

2.72 Two not-for-profit entities remain in the large average deficit category due to factors occurring in current and prior years. The Australian Federal Police (AFP) current year deficit is predominately a result of increased operating costs, including additional protective equipment and cleaning of facilities in response to COVID-19; and increased employee entitlements expenses including additional provision made for unpaid superannuation entitlements. The Department of Industry, Science, Energy and Resources deficit relates to the transfer of functions of the Australian Astronomical Observatory functions to the Australian National University and Macquarie University resulting in significant asset write-offs in 2017–18.

2.73 Five entities recorded large average deficits due to events in the current year:

• Australian Prudential Regulation Authority was impacted by an increase in employee benefits expense of $20.7 million due to an increase in full time equivalent staff, an increase in salary costs and the recognition of a $9 million provision in relation to an initial claim for court awarded costs.²⁹
• Department of Veterans’ Affairs incurred additional contractor expenses of $20.8 million to meet increased demands for processing veteran claims;
• The Department of Parliamentary Services moved from the large average surplus category to the large average deficit category due to increased employee benefits expenses of $2.8 million, supplier expenses $1.4 million and depreciation expenses of $2.2 million relating to the rollout of capital projects; and
• Department of the Prime Minister and Cabinet’s and National Indigenous Australians Agency’s (NIAA) deficits are a result of implementation of AASB 16. PM&C and NIAA leased assets previously recognised as operating lease rentals had to be recognised on the balance sheet, resulting in a higher depreciation expense. Previously, the rental payments on these assets were recognised as rental expense.

Large average surpluses

2.74 As outlined in Figure 2.7, 42 per cent of material not-for-profit entities reported average surpluses of more than one per cent of total expenses over the five year period (2018–19: 44 per cent). The following discussion focuses on the common drivers for these entities’ large average surpluses.

• Consistent with 2018–19, cultural institutions represent a quarter of the entities in the large average surplus category.³⁰ Factors impacting the average surplus are the receipt of goods or donations for no or nominal consideration, and bequests of cash. Cultural institutions frequently receive gifts of heritage and/or cultural items for their collections. The accounting recognition of these items results in revenue being recorded in the period they are received without a corresponding expense. The outcome is that the receiving entity records a significant surplus in those years, affecting the average over the longer term.
• The Commonwealth Scientific and Industrial Research Organisation (CSIRO), recognised a large average surplus of six per cent due to movements in the valuation of equity investments.
• The Australian Nuclear Science and Technology Organisation (ANSTO) recognised a large average surplus due to the additional funding received in the 2019–20 year, which contributed to the significant surplus in the current year.
• Four entities, the Australian Signals Directorate (ASD); Bureau of Meteorology; National Health and Medical Research Council; and Services Australia, continued to report a large average surplus across the five year period. In the current year, the Bureau of Meteorology received additional funding to support the aviation industry, whilst Services Australia received additional funding to deliver Government’s COVID-19 stimulus initiatives. The significant surplus for ASD and the National Health and Medical Research Council relate to decreases in expenditure due to the COVID-19 pandemic.³¹
• The Department of Social Services (Social Services) remains in the large average surplus category in 2019–20. This is primarily due to the recovery of capital works from third parties being treated as revenue under accounting requirements.
• The Australian Research Council recorded an average surplus over the five year period of 6.5 per cent. As reported in Auditor-General Report No.20 2019–20 Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2019, this is due to the timing and recognition of revenue received due to events or project milestones not aligning with the related expenditure.
• As a result of the Administrative Arrangements Order effective 1 February 2020, the Department of Agriculture and Water Resources was abolished and its functions were transferred to the renamed Department of Agriculture, Water and the Environment (DAWE).³² Consistent with the former Department of Agriculture and Water Resources, DAWE has reported a significant surplus in 2019–20 due to revenue collections from cost recovery arrangements. The department operates a number of cost recovery arrangements across the biosecurity, export certification and other business services areas.
• The Australian Office of Financial Management (AOFM) continues to remain in the large average surplus category in 2019–20. In 2019–20, the AOFM surplus was due to additional government funding being received for the implementation and management of the Australian Business Securitisation Fund.³³
• The transition of participants to the National Disability Insurance Scheme (NDIS) and the utilisation of services has impacted the operating result of the National Disability Insurance Agency (NDIA) over the period. There has been a slower phasing of participants than anticipated and lower utilisation of funds by participants which resulted in expenses incurred for 2017–18 to 2019–20 being lower.
• The Department of Finance first assessed Geoscience Australia as a material entity in 2019–20. Geoscience Australia’s operating result places them in the large average surplus category due to delays in the Satellite-Based Augmentation System program relative to the original budget for this program. The expenses for this program have not all been realised in the 2019–20 period.

Balance sheet analysis

2.75 All entities are expected to actively manage their underlying financial position, maintaining asset levels to support their operations and ensuring that sufficient funds will be available to meet liabilities as they fall due.

2.76 The ANAO analysed the balance sheet positions of material Australian Government entities as at 30 June 2020. While it is necessary to have regard to the public sector context, the following two measures are generally accepted indicators of the soundness of entities’ balance sheets and are consistent with the ratios published by Finance.

• Liquidity: the extent to which an entity’s liabilities are covered by cash or other financial assets. An entity where liabilities significantly exceed its financial assets may need a future injection of cash from government to meet those liabilities.
• Gearing: the extent to which an entity’s total assets are funded by debt rather than equity. An entity with high gearing may be running down its asset base that could indicate the need for a future capital injection from government.

2.77 Based on the measures developed by Finance, the ANAO has reviewed an entity’s ability to manage its underlying financial position. As Finance has not developed guidance to assist users in assessing whether the ratios indicate strong or weak financial performance in the context of the government sector, the ANAO consistent with the prior year has determined these parameters.

2.78 In determining the parameters to be applied in 2019–20, as a result of the implementation of AASB 16 the ANAO has revised the parameters previously applied. Whilst the net impact on the balance sheet was limited, as the right-of-use asset and lease liability were largely offset, both the liquidity and gearing ratios of entities have been affected. As entities are required to recognise lease liabilities on their balance sheet this has resulted in entities liquidity ratios deteriorating due to the increase in liabilities compared to financial assets. For this reason parameters set out in Table 2.5 for determining balance sheet categories in 2019–20 have been adjusted. Material entities have been grouped into the following categories:

Table 2.5: ANAO parameters for balance sheet categories

Source: ANAO balance sheet categories.

2.79 Figure 2.9 presents the number of entities in each balance sheet category from 2016–17 to 2019–20. For 2016–17 to 2018–19, the following parameters were used as detailed in Auditor-General Report No.20 2019–20 Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2019:

• Strong: Entities where financial assets were at least 50 per cent of total liabilities and where equity was at least 75 per cent of total assets. These entities have the strongest balance sheets;
• Less Strong: Entities where financial assets were less than 50 per cent of liabilities OR where total liabilities was more than 75 per cent of total assets - these entities had weaker balance sheets, either in liquidity or gearing terms; and
• Weak: Entities where financial assets were less than 50 per cent of liabilities AND where total liabilities were more than 75 per cent of total assets. These entities are the most likely to need additional funding in the future.

Figure 2.9: Balance sheet analysis

 

 

Note: The categorisation parameters were changed in 2019–20, as described in paragraph 2.78.

Source: ANAO analysis of entity balance sheets.

2.80 Fifty-three per cent of material entities had strong balance sheets in 2019–20 with the amended parameters (2018–19: 70 per cent). The main driver for movement between categories in 2019–20 is the implementation of AASB 16.³⁴ To facilitate the implementation of AASB 16, the Department of Finance required Commonwealth entities to apply the ‘modified model’. Under this model entities were not required to restate the comparative information and for this reason there has been a significant change to the liquidity and gearing ratios and it is not therefore appropriate to compare entities’ financial sustainability positions from previous periods.

2.81 The entities with weak balance sheets are predominantly those whose operations are dependent on government policy and continued funding by the Parliament. On this basis, and provided that appropriate attention is given to liquidity issues in the future, these entities are not at high risk of experiencing liquidity problems. Entities with weak balance sheets include:

• the Australian Taxation Office, consistent with 2018–19, continues to have a weak balance sheet. In 2019–20 the recognition of $1.4 billion lease liabilities was slightly offset by a $151.7 million increase in appropriation receivable related to funding provided to support the government’s commitment to address the impact of the COVID-19 pandemic;
• the Department of Social Services balance sheet position was impacted by the recognition of $576.3 million of lease liabilities associated with the implementation of AASB 16 which resulted in a deterioration of the liquidity ratio; and
• NBN Co Limited’s balance sheet continues to be impacted by the loan facility for constructing the national broadband network. NBN Co Limited commenced drawing down on the loan facility towards the end of 2017–18 with an additional $6.4 billion drawn in 2019–20. This has resulted in a weakened balance sheet with an increase in the debt to equity funding mix. The company is forecast to generate free cash flow beyond 2023.

Impact of the COVID-19 pandemic on financial sustainability

2.82 In preparing financial statements, management is required under the Australian Accounting Standard AASB 101 Presentation of Financial Statements (AASB 101), paragraph 25 to make an assessment of an entity’s ability to continue to meet its financial obligations as they are due. When making this assessment, management is required to take into account all available future information for a period of at least 12 months from the end of the reporting period.

2.83 The Auditing Standard ASA570 Going Concern (ASA570) requires auditors to conclude on an annual basis to consider the appropriateness of management’s assessment made in the preparation of the financial report for a period of at least 12 months from the date of the auditor’s report being issued.

2.84 Table 2.6 shows that of mandated financial statement audits undertaken by the ANAO in 2019–20, ten entities were significantly impacted by the COVID-19 pandemic and required either additional funding, letters of support or a restructuring of operations.

2.85 The international and domestic border restrictions since March 2020 has resulted in a decline in activity in the airline industry, and had a significant impact on the operations of Airservices Australia and the Civil Aviation Safety Authority. On 18 March 2020, the Minister for Infrastructure, Transport and Regional Development announced a relief package for the Australian aviation industry which involved the refunding or waiving of a range of government and industry charges that included aviation fuel excise and Airservices Australia charges on domestic airline and security charges.³⁵

2.86 These measures were effective from 1 February 2020. To assist the financial sustainability of both entities, the Minister provided a letter of support outlining the arrangements as a result of the decision to refund or waive charges.³⁶ The government provided funding to Airservices Australia of $831.8 million to support critical operating costs, while the Civil Aviation Safety Authority received additional funding of $15.0 million.

2.87 The Royal Australian Navy Central Canteens Board (RANCCB) operates a number of business around Australia including holiday parks, canteen services, merchandise shops, and a fortnightly raffle. RANCCB restructured its operations, reduced staff and terminated casual employees, accessed business interruption insurance and used significant cash reserves as part of managing its reduction in revenue.

2.88 The Bundanon Trust (the Trust) manages property and a collection of artworks gifted to the Australian Government by Arthur and Yvonne Boyd. The Trust is partially funded by Australian Government grants and earns income from artistic programs, education, collection and property-management related activities. As a result of the COVID-19 pandemic and the 2019-20 bushfires there was significant disruption to the Trust’s operations. The Trust received additional funding from the Australian Government to relocate artwork totalling $1.0 million.

2.89 The Australian Government stimulus package announced on 12 March 2020 included measures covering industries such as tourism, agriculture and education. The Director of National Parks waived $4.2 million in entry fees and $0.4 million in tour operating licences and permit operator packages in 2019–20 and received $4.6 million additional funding under the Assistance for Severely Affected Regions (Special Appropriation) (Coronavirus Economic Resource Package) Act 2020.

2.90 The Great Barrier Reef Marine Park Authority received $8.8 million funding through Appropriation Act (No.5) 2020–21 and $2.6 million from the Assistance for Severely Affected Regions (Special Appropriation) (Coronavirus Economic Response Package) Act 2020 to cover the revenue lost due to the COVID-19 pandemic.

2.91 The Sydney Harbour Federation Trust (the Trust) relies upon revenue from tenants, holiday accommodation, events and programming to sustain its operations. The Trust revenue reduced by approximately $2.4 million during 2019–20 compared to 2018–19. This was due to the impact of the COVID‐19 pandemic on activity in the final quarter of the year. In April 2020, the Government approved the Trust to utilise $13.8 million held in term deposits from the sale of properties to support the Trust’s response to the COVID‐19 crisis. In addition, a further $9.2 million was made available for priority capital works projects.

2.92 As a result of the COVID-19 pandemic Voyages Indigenous Tourism Australia Pty Ltd’s total own-source revenue decreased by $52.4 million in 2019–20 due to reductions in the occupancy rate and average room rate of the entity’s hotels. The reduction in revenue impacted the 30 June 2020 fair value of the Ayers Rock Resort which is valued on a discounted future cash flow basis. A letter of support was provided by the parent entity (Indigenous Land and Sea Corporation) and an Emphasis of Matter has been included in the auditor’s report of Voyages Indigenous Tourism Australia Pty Ltd and Indigenous Land and Sea Corporation.

Audit findings

2.93 Audit findings are raised in response to the identification of a potential business or financial risk posed to an entity. Often these risks arise from deficiencies within an entity’s internal control processes or frameworks. Weaknesses in internal controls increase the possibility that an entity will not prevent or detect a material misstatement in its financial statements in a timely manner. The ANAO rates audit findings according to the potential business or financial management risk posed to the entity. The rating scale is presented in Table 2.7.³⁷

Table 2.7: Audit findings rating scale

Source: ANAO reporting policy.

2.94 A summary of findings identified for the period ended 30 June 2020 by category is presented in Table 2.8.

Table 2.8: Audit findings by category for the period ended 30 June 2020

Source: ANAO compilation of findings.

2.95 In addition to the findings reported in Table 2.8 three legislative breaches were reported during 2019–20. Of these, one is significant (L1) and two are non-significant (L3). The significant legislative breach relates to the Northern Land Council and remains unresolved from the prior year.

Information technology control environment

2.96 The information technology (IT) control environment refers to the policies, procedures and controls that maintain the integrity of information and security of data in an entity. This includes: IT security management, which incorporates user access management, privileged user activity logging and monitoring as well as security configuration settings such as password controls; and IT change management and data centre and network operations, including management of backup and recovery processes. The IT control environment is the environment in which applications run, and so it also supports the effective functioning of the application controls that may be relied on in the audit.

Figure 2.10: IT control environment audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.97 Seven new moderate findings were reported during 2019–20.³⁸ One moderate finding remains unresolved from 2018–19.³⁹

2.98 Users with administrative privileges, commonly referred to as privileged users, are able to make significant changes to IT systems configuration and operation, bypass critical security settings and access sensitive information. To reduce the risks associated with this access, the Information Security Manual requires that privileged user access be appropriately restricted and when provided, that the access is logged, regularly reviewed and monitored. Six of the eight moderate findings relate to privileged user activity monitoring.

2.99 Of the minor findings, 18 were raised in prior years. Four of these minor findings raised in prior years have been unresolved for two or more years.

2.100 User access management includes the processes and procedures to ensure that only authorised users are granted access to systems and data, and that access is removed when it is no longer required. Four of the moderate findings relate to weaknesses in the user access management.⁴⁰

2.101 IT security continues to remain the most common area of weakness in the IT control environment, with almost 65 per cent of findings relating to this area, and 88 per cent of the moderate findings. It continues to require sustained focus by entities to ensure that the risks of unauthorised changes to systems and data and unauthorised data leakage are being appropriately managed.

Compliance and quality assurance frameworks

2.102 Entities rely on internal and external systems, parties and information in decision-making processes. The implementation of effective compliance and quality frameworks and processes provides assurance over the completeness and accuracy of the information and is integral to the preparation of financial statements free from material misstatement.

Figure 2.11: Compliance and quality assurance framework audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.103 The six moderate findings reported during 2019–20 relate to assurance over administered programs, weaknesses in quality assurance processes supporting financial statement preparation and management of staff leave.⁴¹ Two moderate findings remain unresolved from prior years.⁴² Of the three moderate findings raised in 2019–20, one finding was raised relating to a 2018–19 financial statements audit that was finalised on 30 September 2020.⁴³ In addition, one moderate finding relates to the downgrade of a prior year significant finding.⁴⁴

2.104 Of the minor findings, 12 were raised in prior years. Two of these minor findings raised in prior years have been unresolved for two years.

2.105 Overall there has been a decrease in financial statements preparation findings compared to the prior year, however this is accompanied by an increase in the total value of audit adjustments. In addition, the timeliness of financial statements preparation has decreased. Further details can be found in paragraphs 2.30 to 2.39.

Accounting and control of non-financial assets

2.106 Entities control a diverse range of non-financial assets on behalf of the Commonwealth, including land and buildings, specialist military equipment, leasehold improvements, infrastructure, plant and equipment, inventories, and internally-developed software.

Figure 2.12: Accounting and control of non-financial asset audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.107 Two new moderate findings were reported in 2019–20. One related to the management of the national medical stockpile by the Department of Health and one was an upgrade of a prior year minor finding relating to asset policy and procedures in place at Australian Signals Directorate. The moderate finding first reported in 2017-18 to the Department of Defence remains open.⁴⁵

2.108 The thirteen minor findings in this category for the 2019–2020 period relate to:

• valuation adjustments;
• assessments for impairment of assets and restoration obligations;
• data management and integrity;
• inventory management; and
• stocktake procedures.

Revenue, receivables and cash management

2.109 Revenue and receivables include parliamentary appropriations, taxation revenue, customs and excise duties and administered levies. Commonwealth entities also generate revenue from the sale of goods and services and a range of other sources. Cash management involves the collection and receipt of public monies and the management of official bank accounts.

Figure 2.13: Revenue, receivables and cash management findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.110 There is one new moderate audit finding reported in this category in 2019–20 relating to the completeness of bank accounts at the Australian National University. One of the thirteen minor findings remains unresolved from the prior year.

2.111 Seven of the open minor findings relate to revenue and receivables controls. Weaknesses in this category include:

• timeliness and completeness of reconciliations; and
• processes supporting completeness and accuracy of revenue reported including assessment and implementation of AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not For Profit Entities.

2.112 The six remaining open minor findings relate to cash management controls. Cash controls are core processes expected to be in a mature state at every entity. The weaknesses in this category include:

• timeliness and completeness of reconciliations; and
• bank account withdrawal processes and the management of account signatories.

Human resource financial processes

2.113 Human resources encompass the day-to-day management and administration of employee entitlements and payroll functions. Employee benefits represent the most significant departmental expenditure for most Commonwealth entities, and the associated liability is subject to estimates and judgements in inputs.

2.114 Human resource transactions are high volume with both automated and manual processing. As a result, any control weaknesses can result in systematic errors increasing the risk of material misstatement.

Figure 2.14: Human resources financial processes audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.115 The moderate audit findings open at the end of 2019–20 related to weakness in the management of staff leave and controls in payroll processes.⁴⁶

2.116 Of the 16 unresolved minor findings at the end of 2019–20, eight were raised in the current year. Findings related to weaknesses identified in the management of leave balances, commencements and terminations, payroll variances and related party reporting. One minor finding has been unresolved since 2015–16.

Purchases and payables management

2.117 Purchases and payables are payments to, or due to, suppliers including contractor and consultancy expenses, lease payments and general administrative payments. These expenses typically comprise the second most significant departmental expenditure item of entities after employee benefits.

Figure 2.15: Purchases and payables management audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.118 The two new moderate findings relate to segregation of duties deficiencies at the Department of Defence and the expenditure control environment at the Great Barrier Reef Marine Park Authority.⁴⁷

2.119 Of the four minor audit findings unresolved at 2019–20, two were raised during 2019–20. Common weaknesses in this category over the four year period between 2016–17 and 2019–20 are:

• procurement and contract management;
• processes supporting the authorisation of expenditure, including maintaining proper segregation of duties;
• accrual management; and
• maintenance of vendor records and payment controls.

Other audit findings

2.120 Other audit findings typically include items relating to the: management and implementation of service level agreements or memoranda of understanding; updating or maintaining key governance documentation; and findings regarding presentation and disclosure in the financial statements.

Figure 2.16: Other audit findings 2016–17 to 2019–20

 

 

Source: ANAO data.

2.121 The significant audit findings are new findings related to Aboriginal Hostels Limited (AHL) and the Australian Securities and Investments Commission (ASIC). The significant finding for AHL relates to the governance arrangements of the Board in addition to human resources and procurement deficiencies. The ANAO identified deficiencies in the governance of the former CEO’s termination and recruitment of employees, management of conflicts of interest and procurement controls. Further details are included at paragraph 5.12.44.

2.122 The significant finding for ASIC relates to payments to key management personnel. The ANAO identified payments relating to the Chair and one Deputy Chair that appeared to fall outside of the Remuneration Tribunal limits. The ANAO also identified significant deficiencies in the procurement process surrounding the payments made for the benefit of the Chair. Further details are included at paragraph 5.14.45.

2.123 Eight of the minor findings reported in 2019–20 are new and four remain unresolved from the prior year. The findings in this category relate to weaknesses in:

• segregation of duties between processing and approving of manual journals;
• the formalisation of corporate documents including agreements with third parties and internal policies;
• charging of costs between departmental and administered fund sources; and
• fraud risk assessments and reporting of fraud to those charged with governance.

Legislative compliance

2.124 In accordance with ANAO policy, significant legislative breaches are reported to Parliament consistent with the reporting of significant and moderate audit findings.⁴⁸ Significant legislative breaches include: instances of significant potential or actual breaches of the Constitution; and instances of significant non-compliance with the entity’s enabling legislation, legislation that the entity is responsible for administering, and the PGPA Act.

Figure 2.17: Significant legislative breaches 2016–17 to 2019–20

 

 

Source: ANAO data.

2.125 There was one significant breach reported during 2018–19 that remained unresolved during 2019–20. The unresolved finding relates to the Northern Land Council’s failure to fulfil its responsibilities in relation to the requirement for funds in its royalty trust account to be distributed to traditional owners within agreed timeframes.

2.126 The unresolved significant breach was first raised in 2012–13 and related to the Northern Land Council’s non-compliance with the Aboriginal Land Rights (Northern Territory) Act 1976. This Act establishes the Council’s responsibilities for payments in respect of Aboriginal land, requiring payment of an amount equal to amounts received to, or for the benefit of, the traditional owners of the land, within six months after that amount is received through the royalty trust account. Instances of non-compliance continue to occur as not all of the funds in the Council’s royalty trust account had been distributed to traditional owners, within the agreed timeframe.

Introduction

3.1 The Australian Government’s financial reporting framework is based, in large part, on standards made independently by the Australian Accounting Standards Board (AASB). The framework is designed to support decision-making by, and accountability to, the Parliament.

3.2 The AASB bases its accounting standards on the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. As IFRS are designed primarily for use by private sector and for-profit organisations, the AASB amends the IFRS to reflect significant transactions and events that are particularly prevalent in the public sector and not-for-profit private sector. In doing so, it takes into account standards issued by the International Public Sector Accounting Standards Board.

3.3 The Finance Minister prescribes additional financial reporting requirements for Commonwealth entities. These are contained in the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (the FRR). The FRR is made under the Public Governance, Performance and Accountability Act 2013 (the PGPA Act).

3.4 The audits of the financial statements of Australian Government entities are conducted in accordance with the ANAO Auditing Standards, which are made by the Auditor-General under section 24 of the Auditor-General Act 1997. The ANAO Auditing Standards incorporate, by reference, the auditing standards made by the Australian Auditing and Assurance Standards Board (AUASB). The Australian Auditing and Assurance Standards Board bases its standards on those made by the International Auditing and Assurance Standards Board, an independent standard setting board of the International Federation of Accountants.

3.5 The financial reporting and auditing frameworks that applied in 2020–21 are illustrated in Appendices 3 and 4 of this report.

Changes to the Australian public sector reporting framework

The COVID-19 pandemic

3.6 The ANAO’s experience with 2019–20 financial statements audits identified particular challenges for entities when dealing with material uncertainties arising in asset valuations and in performing physical compliance activities such as inventory stocktakes. Due to travel restrictions and lock downs, ANAO staff were restricted in their ability to physically access entities’ premises leading to the increased use of remote access to entity financial management and relevant operational systems. Remote access allowed audit teams to undertake their audit work without the need to be onsite. It is expected that this increased use of remote access will continue in the 2020–21 audit cycle and Commonwealth entities will need to plan for the ongoing impact of the COVID-19 pandemic on their 2020–21 financial statements and the audit of those financial statements.

3.7 The Government’s increasing utilisation of online services in supporting the response to major events such as COVID-19 necessitates that those charged with governance understand their information and data risks along with the need to protect critical information from malicious actors. As the IT control environment remains the category that consistently has the most number of financial audit findings, IT control and Commonwealth entity compliance with mandatory Australian Government cybersecurity frameworks will remain a particular focus of ANAO’s audit work for 2020–21.

Performance framework

3.8 The PGPA Act provides the basis for the Commonwealth performance framework. Commonwealth entities are required to publish planned financial and non-financial performance information with the aim of providing more transparent and meaningful information to the Parliament and the public. Since 2016–17, the ANAO has completed three performance audits covering elements of 10 individual entity performance statements.⁴⁹

3.9 The Independent Review into the operation of the Public Governance, Performance and Accountability Act 2013 and Rule, released September 2018, recommended the Finance Minister, in consultation with the Joint Committee of Public Accounts and Audit (JCPAA), should request that the Auditor-General pilot assurance audits of annual performance statements to trial an appropriate methodology for these audits.

3.10 On 21 August 2019, the Minister for Finance requested that the Auditor-General conduct a program of pilot assurance audits of annual performance statements of Commonwealth entities subject to the PGPA Act, in consultation with the JCPAA. The Auditor-General responded on 14 November 2019⁵⁰, agreeing to the request and proposing to conduct pilot assurance audits of the 2019–20 performance statements of three entities; the Attorney-General’s Department, the Department of Social Security and the Department of Veterans’ Affairs.⁵¹

3.11 The ANAO has completed pilot assurance audits for the Attorney-General’s Department and the Department of Veterans’ Affairs and it is expected that assurance reports will be provided to the Minister for Finance in December 2020. The ANAO withdrew from the Department of Social Services pilot assurance audit as the performance criteria included in the Department’s 2019–20 Corporate Plan may not be sufficiently relevant, reliable and complete to measure the achievement of the Department’s purposes. In response, the Department has significantly revised the performance measures in its 2020–21 Corporate Plan adding targets and methodologies to each measure to better align with the requirements of the Commonwealth performance framework. The Auditor-General will also report to the JCPAA on the outcomes of the pilot.

Auditing under the performance framework

3.12 Assuring performance information is an emerging area of practice in the Australian and international audit profession. While assurance standards exist for the audit of non-financial historical information, more specific guidance from standard-setters is still in development. The International Auditing and Assurance Standards Board (IAASB) has established a project to develop non-authoritative guidance and provide leadership on Extended External Reporting (EER) Assurance. The project issued draft guidance in March 2020 for consultation and intends to issue a final iteration in March 2021. EER relates to various forms of reporting such as performance information, integrated reporting and other reporting by entities about matters additional to the information addressed in the financial statements.

3.13 In conducting its pilot audits of performance statements, the ANAO has applied ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ASAE 3000). The ANAO continues to refine its methodology for the conduct of these audits and to develop associated policy and guidance on the application of ASAE 3000 to the Commonwealth’s performance reporting framework. This work also considers the output from the IAASB EER assurance project.

3.14 The audit of performance statements is similar to financial statements audits in that the auditor’s overall objective is to form a view about whether the auditee’s statements accurately report on the delivery of activities by the entity. However performance statements reporting is not based on a detailed prescriptive framework supported by standards equivalent to the Australian Accounting Standards but rather a set of general principles. The performance framework is designed to allow for a diverse range of performance objectives, measures and results, originating from auditee systems and processes not previously subject to the rigors of audit. This presents audit challenges including the need for a methodology suited to supporting a consistent audit approach across entities when assessing the appropriateness and completeness of performance measures, and when forming an opinion over whether results are fairly reported.

3.15 The ANAO’s methodology for performance statements audits is subject to the ANAO’s overarching quality framework as described later in this chapter.

Auditor reporting

3.16 The auditor shares the result of the completed audit work with users through the auditor’s report which includes the auditor’s opinion on the preparation and fair presentation of the financial statements. Auditor reports are intended to be broadly consistent and comparable to promote the credibility of the audit process, the understanding by users of the scope and nature of an audit and also assist users to identify unusual circumstances when they are reported.

3.17 In recent years the ANAO has introduced reporting Key Audit Matters in auditor’s reports in accordance with ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report. The ANAO’s implementation of this standard is discussed in this report in Chapter 2. While the primary objective of Key Audit Matters reporting is to promote understanding about the work of auditors, an additional benefit is that it helps users to navigate the financial statements, serving as a roadmap to the higher risk areas of the financial statements.

3.18 Where appropriate, the auditor’s report on the financial statements may include an ‘emphasis of matter’, ‘other matter’ or ‘material uncertainty related to going concern’ paragraph. A report on other legal and regulatory requirements may accompany the auditor’s report on the financial statements. The inclusion of these paragraphs does not modify the auditor’s opinion.

3.19 Most commonly, an ‘emphasis of matter’ paragraph is a tool available to auditors to highlight important information. Such a paragraph is included in the auditor’s report when the auditor considers it necessary to draw to users’ attention a matter presented in the financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to the users’ understanding of the financial statements.

3.20 The circumstances in which an emphasis of matter is required by the auditing standards include:

1. when financial statements and the auditor’s report have been issued and a fact is discovered that leads to revised financial statements and a new auditor’s report being prepared; and
2. when financial statements have been prepared in accordance with a special purpose framework, and as a result the financial statements may not be suitable for another purpose.

3.21 The auditor is also required to exercise their judgement to determine if an emphasis of matter paragraph is required in other circumstances where a matter is fundamental to the users’ understanding of the financial statements. This may include restatement of comparative information because of material prior period errors, entities whose financial statements are prepared on a non-going concern basis and circumstances where the financial statements have disclosed significant areas of judgement or uncertainty where the impact is particularly significant.

3.22 For further information about ‘other matter’ and ‘material uncertainty related to going concern’ paragraphs, refer to Appendix 4.

Changes to auditing standards

3.23 In December 2018 the AUASB issued the revised ASA 540 Auditing Accounting Estimates and Related Disclosures (ASA 540) which prescribes the auditor’s responsibilities with respect to accounting estimates and their related disclosures, such as valuations of financial and non-financial assets and measurement of provisions and other liabilities. ASA 540 is the Australian adoption of the revised international auditing standard ISA 540 of the same name. The new standard will apply to ANAO audits of financial statements for the year ended 30 June 2021 and later years.

3.24 The significant revisions to the standard are intended to address two major threats to the quality of financial statement audits:

1. increasing complex business and accounting environment with respect to estimates, leading to the increased prevalence in financial statements of complex, higher-risk accounting estimates such as expected credit losses, insurance contracts, revenue recognition and lease recognition; and
2. recurring audit inspection findings with respect to audit quality over accounting estimates.

3.25 The standard emphasises and strengthens requirements for risk assessment, introducing new risk concepts of complexity, subjectivity and estimation uncertainty to assist auditors to identify the most important areas of audit effort and prescribing enhanced procedures with respect to understanding the entity, its environment and its internal control environment affecting estimation.

3.26 The standard also aims to drive audit quality by specifying more specific objective-based mandatory audit procedures, emphasising the importance of professional scepticism and enhancing the audit requirements for management disclosures.

3.27 The revised ASA 540 places emphasis on the need for auditors to understand and assess the risk that estimation uncertainty along with the use of management judgement may result in material misstatement in the financial statements. Entities should therefore expect that auditors are likely to seek evidence that management has identified and assessed significant estimation uncertainty risks. Where significant estimation uncertainty is identified auditors will want to review documentation supporting the methods, significant assumptions and data used by management to arrive at an estimate.

3.28 While audit committees are already expected to consider accounting estimates with significant judgement, closer attention by auditors in accordance with the revised ASA 540 may require management to provide additional information to audit committees around these areas. Audit Committees are likely to continue to see significant coverage of accounting estimates in closing letters and other communication from ANAO audit teams.

Changes to accounting standards

3.29 There are no new accounting standards expected to have a significant impact on Commonwealth entities’ financial statements for 2020–21.

3.30 2019–20 saw the implementation of three new or significantly updated accounting standards: AASB 15 Revenue from Contracts with Customers, AASB 1058 Income of Not-for-Profit Entities and AASB 16 Leases.

3.31 ANAO observed that entities that made use of the detailed guidance and support materials provided by the Department of Finance were able to transition to the new standards with relatively few issues. As with any major change or update in accounting standards, there were unforeseen issues such as differentiating between grants that support the objectives of the entity and grants that create an obligation to deliver goods or services to customers. The ANAO will continue to work with the Department of Finance to address identified issues for 2020–21.

Quality Assurance Framework and Reporting

ANAO Quality Assurance Framework

3.32 The quality of ANAO audit work is reliant on the strength of its independence and quality control processes. The ANAO defines audit quality as the provision of timely, accurate and relevant audits, performed independently in accordance with the Auditor-General Act, ANAO auditing standards and methodologies, which are valued by the Parliament. Delivering quality audits results in improved public sector performance through accountability and transparency.

3.33 The ANAO Quality Assurance Framework and Plan 2019–20 is published on the ANAO website and articulates the system of quality control that the ANAO has established to support the delivery of high-quality audit work and enables the Auditor-General to have confidence in the opinions and conclusions in the reports prepared for the Parliament. The Framework is supported by the Audit Quality Report 2019–20 which reports on our achievement against the Framework for the 2019—20 financial year, including the results of internal and external review activities.

3.34 The ANAO quality assurance framework complies with the requirements of Auditing Standard ASQC 1 – Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, Other Assurance Engagements and Related Services Engagements. The framework encompasses a number of key elements including learning and development requirements, delegations framework, methodology development and review, an escalation framework for difficult or contentious matters or qualifications risk, both supervisory and arms’ length internal review, and external review.

Ethics, independence and integrity

3.35 Ethical requirements, with a focus on independence are core to the quality framework. The fundamental principles of professional ethics as set out in APES 110 Code of Ethics for Professional Accountants are integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. The ANAO maintains a continued focus on independence through the application of the ANAO Independence Policy that manages threats to independence in the conduct of the ANAO’s work. In June 2020 the ANAO developed an Integrity Framework which provides an overarching structure to the existing ANAO integrity control system, supporting our institution’s integrity. The framework encompasses the ANAO Integrity Statement, which describes five key principles of integrity that staff at the ANAO uphold — independence, honesty, accountability, openness and courage.

Quality control and consultation processes

3.36 In the conduct of their work ANAO auditors apply a robust methodology to drive consistent quality and compliance with the ANAO Auditing Standards. The ANAO audit methodology incorporates policies regarding direction, supervision and review, consultation on significant technical and ethical issues, engagement quality control review of high risk audits and documentation of audit evidence and work performed.

Data Analytics 2020–21

3.37 The ANAO released its Data Analytics Strategy 2018–20 (Strategy) in March 2018, looking at how data analytics can be used to enhance audit quality and efficiency. The Strategy focuses on developing innovative and effective use of data analytics, building capability, generating new products, enhancing quality and increasing efficiency.

3.38 In 2020, the ANAO has continued to progress the goals of the Strategy by extending data analytics solutions to an increased number of entities, including:

• developing standardised solutions that are scalable, repeatable and transferable; and
• streamlining and standardising data acquisition processes with entities.

3.39 Building on learnings from the 2018–19 financial statements audit program, in 2019–20, 80 per cent of the audits of major entities conducted in-house involved the use of data analytics as part of their financial statements audits to enhance efficiency, quality and effectiveness, in particular by supporting the testing of entire population of data. This resulted in better identification of outliers and anomalies for target testing, providing audit assurance, and automation of processes with significant manual and repetitive elements.

3.40 The ANAO also developed a data analytics solution to audit the practices by which three major entities managed staff leave and whether they complied with relevant policies and procedures. Cross-data validation and recalculation techniques were applied to generate insights into how leave was managed using population datasets provided by individual entities.

3.41 Below are a number of case studies from the 2019–20 financial statements audit program where data analytics has been used in delivering efficient and effective audits.

Case study 1: Standardised HR analytic solution

3.42 The ANAO developed a standardised dashboard-based HR Analytics solution to confirm the completeness and accuracy of entities’ payroll expenses. This approach supported a large number of financial statements audit teams using a routine data extract that entities prepared for the Australian Public Service Commission (APSC) in the 2019–20 cycle.

3.43 The solution standardised the calculations the ANAO perform each year, and was built to align with the substantive analytics procedures used to recalculate payroll expenses. This approach resulted in improved audit quality by providing a greater depth of analysis through the use of population data and a rigorous analytical approach. The use of a standardised solution across multiple entities has provided efficiencies in terms of consistency in data collection, documentation and review processes.

Case study 2: Streamlined Defence data acquisition

3.44 The ANAO worked with the Department of Defence to develop a process to streamline data extraction for journal testing as part of the financial statements audit, whereby Defence developed an automated tool that extracted data to ANAO’s specification. By reducing the complexity of data acquisition, the ANAO can more effectively target specific risk areas, improving the audit outcomes. The streamlined process is expected to significantly reduce time spent on data collection in future audit cycles from days to hours. While the solution has been developed to address the particular challenges of the Defence audit data size and classification, the ANAO is planning to develop it into a standardised journal testing solution that could be applied to other major entities to drive future efficiency.

Case study 3: Provide assurance over entity’s revenue

3.45 The ANAO developed a data analytics approach to provide assurance over the completeness and accuracy of Airservices Australia’s revenue for the 2018–19 financial statements audit. The approach recalculated the revenue and provided assurance over 99.9 per cent of the revenue recognised in the entity’s financial statements. In 2019–20, the approach was re-used with 50 per cent efficiency gain. The audit approach has remained unchanged despite COVID-19, providing further efficiencies. As the revenue model is based on recalculation (with assurance over the integrity of source transaction data), not prediction, the same level of assurance continued to be provided. Figure 3.1 shows an example of how flight records, used as the independent variable in the revenue recalculation, have changed over time in the last financial year.

Figure 3.1: Number of flight records from Airservices Australia’s flight billing system from 1 July 2019 to 30 June 2020

 

 

Source: ANAO analysis

Future plan

3.46 The ANAO will continue to enhance audit efficiency, quality and effectiveness, by:

• identifying more opportunities to standardise common analytic solutions;
• deploying and embedding the data analytic solutions already developed in the normal work processes across financial statements audits; and
• growing capabilities in technology to respond to the digital transformation of the public sector.

Introduction

4.1 Effective management of employee leave is important in the efficient utilisation of human resources. The benefits of the effective management, planning and application of leave include:

• achieving work life balance and wellbeing for employees through periodic use of recreational (annual) leave;
• reducing the use of personal leave, including for stress-related illness, through improving staff wellbeing as a result of regular periods of leave being taken;
• staff development through acting opportunities during periods of leave, thereby enhancing staff motivation, experience and supervisory and leadership skills as well as improving succession planning options;
• reducing the incidence of large periods of leave which may have a more noticeable impact on deliverables;
• managing annual expenses and liabilities at sustainable levels, as leave taken is accounted for as a reduction in liabilities not an expense on the statement of comprehensive income; and
• reducing the risk of undetected fraud through concealment by officers that minimise absences.

4.2 Human resource financial processes encompass the day-to-day management and administration of employee benefits inclusive of payroll and other entitlements, such as leave.

4.3 Employee benefits (including wages and salaries, superannuation, leave, separation and redundancies) represent the most significant departmental expenditure for most Commonwealth entities, and the inputs and estimates that contribute to the measurement of the associated liability are subject to management judgement. In 2019–20, leave and other entitlements represented $3.8 billion (6.8 per cent) of Australian Government employee benefits expenses ($55.3 billion) and $11.0 billion (2.4 per cent) of Australian Government employee benefits liabilities ($465.5 billion) as at 30 June 2020. This included a $3.1 billion (6.0 per cent) increase in employee benefits expense and $21.4 billion (4.8 per cent) increase for employee benefits liabilities from 2018–19.

4.4 Employee benefit transactions are high volume and involve both automated and manual processing. As a result, any control weaknesses can result in systematic errors increasing the risk of material misstatement of financial statements.

Previous financial audit findings for human resource financial processes

4.5 During the period from 2015–16 to 2018–19, the open audit findings relating to human resource financial processes reported by the ANAO increased from 2 moderate and 20 minor audit findings in 2015–16 to 3 moderate and 26 minor audit findings in 2018–19.⁵² The analysis of open findings by category of financial process at the completion of the ANAO’s 2018–19 audits, shows the human resource financial process was the third highest category for moderate findings and the second highest category for minor findings.

4.6 As a result of the increase in findings relating to human resource financial processes, and the significance of these as a proportion of all financial statements audit findings, the ANAO undertook targeted assurance activities over the management of staff leave. The selection of the leave component of employee benefits was due to the relative complexities in entity management of leave compared to payroll.

Selected entities

4.7 Three financial statements audits were selected for further assessment of compliance of the management of leave accruals and balances with human resource policies and requirements. The results of the analysis will further inform the ANAO’s assurance activities for future audits. The entities selected were: Department of Home Affairs; Department of the Prime Minister and Cabinet; and Department of the Treasury (the Treasury).

4.8 The annual reports of entities reported the following leave and other entitlements at 30 June 2020:

• Department of Home Affairs: $282.7 million expense (8.4 per cent of departmental total expenses) and $511.9 million liability (20.5 per cent of departmental total liabilities).
• Department of the Prime Minister and Cabinet: $11.6 million expense (4.7 per cent of departmental total expenses) and $40.8 million liability (23.4 per cent of departmental total liabilities).
• The Treasury: $16.5 million expense (7.2 per cent of departmental total expenses) and $63.2 million liability (31.0 per cent of departmental total liabilities).

4.9 Through this work, the ANAO has assessed whether:

• established framework and policy documents are clearly articulated and consistent with laws, regulations and agreed conditions;
• entities have implemented appropriate monitoring controls over the management of staff leave with results reported to appropriate levels of management; and
• the completeness and accuracy of leave accruals and adjustments are adequately supported by documentary or other evidence.

Frameworks, legislation and policies

4.10 The frameworks, legislation and policies of the three entities were identified within the Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities and summarised in Table 4.1.

Table 4.1: Employee condition frameworks, legislation and policies

Note a: www.fairwork.gov.au/employee-entitlements/national-employment-standards

Source: As referenced and ANAO analysis of entity requirements, conditions and frameworks.

4.11 The inclusion of appropriate arrangements within an organisation’s employee agreement(s) and contracts is a key element in the management of staff leave entitlements. This includes facilitation of effective management of the financial implications, as well as the occupational health and safety implications through encouragement of regular annual leave use.

4.12 The enterprise agreement of each audited entity include provisions that detail employee leave entitlements and arrangements. These arrangements are supported by associated policy and guidance. To avoid accumulation of large balances, entities either require or encourage the utilisation of annual and flexible (commonly referred to as “flex”) leave. Examples of leave provisions included in the enterprise agreements or workplace determination of the audited entities are shown in Table 4.2.

Table 4.2: Example staff leave conditions

Source: ANAO analysis of entity conditions.

4.13 The three entities selected were found to have effective practices to identify leave requirements and conditions established in legislation, awards, and workplace agreements and determinations. The Department of the Prime Minister and Cabinet and the Department of the Treasury have established appropriate frameworks to address staff leave requirements and conditions. While the Department of Home Affairs has effective practices to identify requirements and conditions, there have been delays in formalising the leave policy to contain current information or requirements following the February 2019 Workplace Determination.

Completeness and accuracy of leave accruals and adjustments

Annual leave and long service leave balances reported within the financial statements

4.14 Section 7 of the Public Governance, Performance and Accountability (Financial Reporting Rule 2015) requires Australian Government reporting entities to apply applicable Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB). This includes AASB 119 Employee Benefits, which requires the reporting of liabilities relating to annual (section 11) and long service leave (section 155). Table 4.3 shows the annual and long service leave provisions for the three entities for the period 30 June 2018 to 30 June 2020.

Table 4.3: Entity annual and long service leave provisions

Note a: On 1 July 2019, the Indigenous Affairs functions transferred from the Department of the Prime Minister and Cabinet to the newly created National Indigenous Australians Agency (NIAA). This transfer was the primary reason for the reduction in the number of employees between 2019 and 2020.

Note b: The adjusted 30 June 2019 annual and long service leave provision values are $13.1 million and $25.0 million respectively when excluding staff transferred to the National Indigenous Australians Agency during 2019–20.

Source: ANAO analysis of entity advice of FTE staffing level at 30 June 2018, 30 June 2019 and 30 June 2020 and entity 2017–18 to 2019–20 annual reports and financial results.

4.15 The increases in long service leave provisions between 2018 and 2020 were influenced in part by declining long-term government bond rates used to value the related balances. Similar impacts on annual leave were not observed, as these are shorter-term liabilities.

4.16 The travel restrictions relating to the COVID-19 pandemic have in many cases resulted in staff leave balances increasing in 2019–20 as a result of many staff taking less leave than in previous years. The results of the targeted assurance activities detailed in paragraphs 4.17 – 4.70 were not impacted by the COVID-19 pandemic as these were performed over the period 1 July 2018 to 31 December 2019.

4.17 Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities identified non-compliance in the timeliness of submission and approval of leave requests. All entities assessed have a policy that requires certain leave types (including annual, long service, study and maternity leave) to be approved in advance of leave commencing and this be recorded on the human resource management information system (HRMIS). Each entity has envisaged there may be occasions where this is not practical including through injury, illness and emergency where personal leave entitlements are exhausted. The ANAO’s analysis identified that the following proportions of those leave types where the HRMIS did not evidence approval in advance of that leave commencing:

• Department of Home Affairs – 30 per cent;
• Department of the Prime Minister and Cabinet – 24 per cent; and
• the Treasury – 18 per cent.

4.18 Further analysis of the above results are available in paragraphs 3.40 – 3.54 of Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities. That report also identified a relationship between the proportions of unscheduled leave (including sick, carer and bereavement leave in addition to other types such as recreational, long service, maternity and study) with employee levels. The proportion of unscheduled leave use decreases with advancement of employee level.

4.19 Details of further analysis and instances of non-compliance with entity policies and guidance are outlined in the subsequent paragraphs.

Annual leave balances

4.20 Each of the three entities have conditions relating to excessive annual leave balances. The Department of Home Affairs and Department of the Prime Minister and Cabinet apply a threshold equivalent of two years’ accrual (40 days), while the Treasury apply a threshold equivalent to three years’ accrual (60 days).

4.21 While the Department of Home Affairs’ Workplace Determination defines excessive annual leave balances as 40 days, the approach applied is less prescriptive than the other two entities. There is no policy regarding excess annual leave only that “…managers may direct an employee with more than two years leave credits to take an amount of leave up to one quarter of their annual leave credit at the time the direction is given.” Without clear policy or guidance, it is not clear how the discretion of managers is being monitored to provide assurance that reasonable annual leave balances are being maintained for the well-being of staff and minimisation of associated risks. While the Department of Home Affairs has not demonstrated its assessment that the excess annual leave was appropriate, this entity has advised it continues to monitor and manage excessive annual leave on a case-by-case basis.

4.22 Table 4.4 shows the proportion of staff with excess annual leave balances in the three entities at three dates – 1 July 2018, 30 June 2019 and 31 December 2019. This result is higher than that observed in Auditor-General Report No.4 2009–10 The Management and Processing of Annual Leave. In that report, the proportion of the staff in the audited organisations (Australian Taxation Office, the former Department of Broadband, Communications and Digital Economy and Australian Bureau of Statistics) with excess annual leave balances ranged from 1.0 per cent to 4.5 per cent for a single date selected for analysis.⁵³

Table 4.4: Excessive annual leave balances in the audited entities as at 1 July 2018, 30 June 2019 and 31 December 2019

Source: ANAO analysis of individual leave balances within entities.

4.23 For comparative purposes, the following was observed if a 40 day threshold (consistent with the other two entities) was applied to the Treasury annual leave balances:

• 327 staff representing 25.6 per cent exceeded a 40 day annual leave balance for one of the three dates; and
• 199 staff representing 15.8 per cent exceeded a 40 day annual leave balance for consecutive dates.

4.24 Consistent with the highest threshold for identification of excessive annual leave balances, results indicate the Treasury has the highest comparable rates of significant leave balances and average annual leave liability per staff member based on FTE staff for 2018–2020 (as reported in Table 4.3).

4.25 The accumulation of high levels of annual leave balances as observed above reduces the benefits that are obtained from regular use of annual leave as detailed in paragraph 4.1. It also increases the liability carried by entities and may impact on future services provided when staff take accrued annual leave.

Purchased leave

4.26 Purchased leave is a mechanism where staff may purchase additional leave. The following shows the conditions each entity places on purchasing of leave:

Table 4.5: Purchased leave conditions

Source: ANAO analysis of entity purchase leave conditions.

4.27 Entity specific controls relating to purchased leave include:

• the Department of Home Affairs’ easySAP system is used for submission and approval of purchased leave and applies a preventative control to ensure a maximum of 40 days is purchased each year;
• the Department of the Prime Minister and Cabinet uses workflow approvals within its HRMIS and applies a purchased leave calculator to provide assurance that calculations are in accordance with policy; and
• the Treasury has implemented an audit process where purchased leave is audited 12 months after purchase to provide assurance over the accuracy of related calculations. The ANAO obtained assurance the audits are being performed by testing a sample of these with satisfactory results.

4.28 The following observations were made in the analysis of purchased leave:

• Department of Home Affairs:
  • 22 employees with 73 total instances (representing 0.8 per cent of instances of purchased leave taken) where purchased leave was approved when employees had excessive annual leave credits.
  • While the associated Procedural Instruction is currently in draft, the instances are inconsistent with the department’s Fact Sheet for Excess Annual Leave. The Fact Sheet provides that it would be appropriate for the delegate not to approve the employee to access purchased leave until such time as their excess annual leave balance has been reduced.
  • The entity has advised that in individual circumstances, it may be appropriate for a manager to approve the purchasing of leave despite an employee having in excess of two years’ worth of annual leave accrued and this did not represent non-compliance with policies. However, support was not provided to evidence the appropriateness of the approval in the 73 instances identified.
• Department of the Prime Minister and Cabinet: eight employees with 59 total instances where the use of purchased leave was less than five days. This represented 14.3 per cent of staff that had purchased and used this leave. While a delegate can approve use below the five day minimum, the reasons for this approval were not documented.
• The Treasury: no audit issues were identified in testing.

Long service leave and prior service

4.29 An employee is eligible for long service leave in accordance with the Long Service Leave (Commonwealth Employees) Act 1976. Amongst other matters, this legislation provides for prior service that can be recognised and long service leave accrues at the rate of 0.3 months per year of service.

4.30 Common Australian Public Service conditions that have been adopted by the three entities include: the minimum period during which long service leave can be taken is seven calendar days at full pay (or 14 calendar days at half pay); and long service leave cannot be broken with other periods of leave, except as otherwise provided by legislation.

4.31 Procedures that were performed by the ANAO relating to long service leave included testing: the recognition of prior service; compliance with the legislative requirements relating to the minimum use of this leave; and whether other types of leave had inappropriately broken long service leave.

4.32 For the Department of Home Affairs, the ANAO selected a sample of 53 employees from the population of employees with prior service. Based on this sample, the following observations were made relating to management of long service leave:

• there were seven instances where the annual leave balance as per the prior service documentation did not agree to Home Affairs SAP HR; six instances where the prior service checklist, recognition of prior service or leave liability checklist was not reviewed and approved by the delegate; and one instance where the department could not locate the prior service documentation.
• there were 10 instances identified where the conditions relating to the minimum use of long service leave were not adhered to; and
• two employees broke their long service leave over a public holiday by using annual leave when the practice is not permitted under their conditions.

4.33 No matters of non-compliance relating to management of long service leave were identified for the Department of the Prime Minister and Cabinet.⁵⁴

4.34 For the Treasury, 10 instances relating to six employees were identified where the conditions relating to the minimum use of long service leave were not adhered to.⁵⁵

Unscheduled leave utilisation

4.35 Unscheduled leave includes sick, carers, compassionate and other miscellaneous leave. The Australian Public Service Commission has reported that unscheduled absences have incrementally reduced between 2014–15 to 2016–17. The average rate of unscheduled absences across all Australian Public Service agencies was 11.4 days per year in 2016–17.⁵⁶

4.36 Figures 4.1–4.3 identify the distribution of the submission of personal leave taken for the three entities during the period 1 July 2018 to 31 December 2019. They show there were instances of significant delays in the submission of personal and carers leave applications by staff of the Department of Home Affairs and Department of the Prime Minister and Cabinet and personal leave applications for the Treasury. This is not consistent with the related policy that approval for this leave be obtained as soon as possible upon return to work for the Department of the Prime Minister and Cabinet and the Treasury, and within 30 days of returning to work for the Department of Home Affairs.

Figure 4.1: Department of Home Affairs’ distribution of days taken for submission subsequent to the end date of unscheduled leave

 

 

Source: ANAO analysis of individual leave submissions for the Department of Home Affairs.

Figure 4.2: Department of the Prime Minister and Cabinet’s distribution of days taken for submission subsequent to the end date of unscheduled leave

 

 

Source: ANAO analysis of individual leave submissions for the Department of the Prime Minister and Cabinet.

Figure 4.3: The Treasury’s distribution of days taken for submission subsequent to the end date of unscheduled leave

 

 

Source: ANAO analysis of individual leave submissions for the Treasury.

4.37 Figure 4.4 shows the proportion of personal leave that commenced on each business day for the three entities for the period 1 July 2018 to 31 December 2019. The result has identified a consistent trend between the three entities, with the highest proportion of personal leave commenced on Mondays, with relatively consistent levels but declining levels for Tuesday to Thursday and a further reduction for Friday.

Figure 4.4: Proportion of personal leave commencing on each business day

 

 

Source: ANAO analysis of personal leave taken by officers at the Department of Home Affairs, Department of the Prime Minister and Cabinet and the Treasury.

4.38 To provide the basis for comparison with entity results, Figure 4.4 includes the proportion of days of the week that are not national public holidays, comparable state public holidays or entity year-end closedown – a measure of available attendance days. The observed trend of reducing rates of commencement of personal leave for each subsequent day of the week suggests scope exists for exploration by entities to determine contributing factors and potential initiatives to increase attendance on Mondays in particular.

4.39 Analysis was also performed over the average use of personal (sick) leave by each full-time equivalent staff member for the three entities, including differentiating between those officers with excessive annual leave balances at the end of respective periods. The results of this analysis is shown in the following table.

Table 4.6: Average personal leave use for each full-time equivalent based on status of annual leave balance at the end of each respective period

Source: ANAO analysis of personal leave taken and excessive leave balances as determined by entity policies. Based on officers employed by each department for the entire period (1 July 2018 to 30 June 2019 and 1 July to 31 December 2019 respectively).

4.40 The analysis identified consistent results across the periods 1 July 2018 to 30 June 2019 and 1 July to 31 December 2019 for the three entities. Entities were advised of the results to facilitate further analysis and to enable entities to consider whether there are actions that could be taken that may increase rates of attendance. The results included:

• considerable differences in the average personal leave taken between the three entities. Officers from the Department of Home Affairs averaged the most personal leave taken followed by the Department of the Prime Minister and Cabinet and the Treasury;
• officers from the Department of Home Affairs and the Treasury used proportionately more personal leave days during 1 July to 31 December 2019 than 1 July 2018 to 30 June 2019, suggesting seasonal factors or an escalation in the use of this leave; and
• fewer personal leave days taken by officers that held excessive annual leave balances at the end of the two periods compared to officers who did not hold excessive annual leave balances.

4.41 The following additional observations were made for the Department of Home Affairs:

• a sample of 50 instances of personal leave supported by a medical certificate identified: eight per cent of medical certificates had not been retained as required; 12 per cent of medical certificates could not be confirmed as the department was not able to present these; two per cent of instances where medical certificates could not be sighted by the ANAO due to circumstances for that employee; and two per cent of instance where the leave was not approved within 30 days of the employee’s return to work as required by policy; and
• the department does not have the ability to run a system report on the approval of additional personal leave where employees had exhausted their personal leave entitlements. This limitation prevented the ANAO from testing whether additional personal leave had been granted, as appropriate assurance could not be obtained over a manual listing maintained by the entity.

4.42 The Department of the Prime Minister and Cabinet does not require managers to document decisions made to waive the requirement to provide a medical certificate for personal leave exceeding two days. This represented 1.9 per cent of total personal leave taken.

4.43 The following observations were made for the Treasury:

• retention of medical certificates is not required; and
• a sample of 30 instances of leave supported by a medical certificate identified: 10 per cent of sample items where the certificate did not fully support the period of leave taken; and 47 per cent of sample items where the medical certificate was not retained.

4.44 Results of the testing performed by the ANAO indicate there is scope for staff and managers to further enhance compliance and management of requirements regarding personal leave.

Flexible leave balances

4.45 Flexible leave (commonly referred to as ‘flex’) is a formal system of providing APS 1 to APS 6 classification employees with flexible working arrangements through variable working hours, patterns and arrangements in these three entities. Conditions relating to flexible leave are contained within enterprise agreements including maximum credits and debits. Managers are responsible for monitoring the accuracy of time recording and flexible leave balances.

4.46 Other arrangements may be available for Executive Level officers including time off in lieu in particular circumstances.

4.47 Table 4.7 shows the results of the related analysis with entity conditions.

Table 4.7: Excessive flexible leave balances in the audited entities between 1 July 2018 and 31 December 2019

Source: ANAO analysis of employee conditions and flexible leave balances at each entity.

4.48 For the Department of Home Affairs it was identified that six employees had accrued flexible leave each exceeding 600 hours while acting in an Executive Level 1 position – a position with no entitlement to flexible leave.

4.49 The following additional observations were made for the Department of Home Affairs:

• the Workplace Determination provides that the Secretary may approve a higher flexible leave credit carryover on a temporary basis with delegated approval provided to all officers at the Executive Level 1 and above positions. While the department did not demonstrate the identified instances were either of a temporary nature or appropriate, the department advised instances of excessive flex credits do not represent non-compliance with policy;
• the following staff levels held an average flexible leave balance that exceeded the maximum entitlement of 37.5 hours: APS 6 (78.7 hours); APS 5 (71.3 hours); APS 4 (56.1 hours); APS 3 ( 60.9 hours); and APS 2 (65.6 hours); and
• currently there is no compliance report being run or monitored centrally. While the Executive Dashboard provides information on staff leave balances, it does not provide information on the timely entry of information within the system.⁵⁷

4.50 For the Department of the Prime Minister and Cabinet, the following observations were made:

• a maximum flexible leave credit balance has not been established by the entity;
• if a similar maximum flexible leave credit to the other two entities had been applied (one week), 247 or 18.8 per cent of employees would have exceeded this. Including the percentage of non-compliance with the maximum debit balance (4.9%), this would have resulted in the highest rate of the three entities;
• the largest credit and debit balances were 705 hours and 57 hours respectively;
• APS 6 level staff held the highest average flexible leave balance with 30.0 hours; and
• the average flexible leave balance generally increased with advancement through the APS levels with the exception of the APS 4 level which recorded a higher average than the APS 5 level.

4.51 For the Treasury, the following observations were made:

• from October 2019, the Treasury has moved from the use of ‘flex sheets’ to maintaining time and flexible leave records on HRMIS automatically generated timesheets that are approved by managers;
• the largest credit and debit balances were 133.25 hours and 43.45 hours respectively;
• the average flexible leave balance for APS 4 level staff was 54.5 hours – exceeding the maximum entitlement; and
• the highest average flexible leave was at the APS 4 level and reduced with advancement of positions thereafter.

4.52 The results of the analysis suggest that establishing a policy regarding maximum credit balances impacts employee behaviour and the outcomes achieved.

Maternity and parental leave

4.53 The entitlement to maternity leave is provided under the Maternity Leave (Commonwealth Employees) Act 1973. Division 5 of Part 2-2 of the Fair Work Act 2009 sets out the entitlements to parental leave.

4.54 For the Department of Home Affairs, the following observations were made:

• entitlements are managed by application of manual controls through the Human Resource area;
• weaknesses were identified in the retention of documentation supporting absences and the management of absences. This included the results of sample testing of 50 instances of maternity leave where 56 per cent of maternity leave checklists had not been reviewed by an independent officer as required;
• four instances from the population of maternity leave taken where the threshold for maternity leave to count as service was exceeded; and
• four instances from the population of maternity leave taken where entitlements to paid and unpaid paternity leave were exceeded.

4.55 No audit issues were identified in testing compliance with policies for the Department of the Prime Minister and Cabinet and the Treasury.

Analysis of attendance and accuracy of leave records

4.56 The ANAO intended to report on analysis of physical and network access data held by entities as a measure of evaluating the accuracy of reported attendance and leave by officers. This analysis was based on the assumption that where officers need to either access locations with physical security measures or require the use of computer networks to perform their duties, access of these would occur regularly for the days worked and evidence their attendance.

4.57 However, in conducting the analysis, a number of limitations associated with the data provided by entities influenced the reliability of results for the purpose of this testing. These limitations included:

• The Treasury’s retention of network access data was limited to a specific number of days. This meant that the analysis for the Treasury was limited to: a period that was much shorter and varied from the remaining two entities; and covered the peak of COVID-19 pandemic restrictions where most staff were working from home and not using their physical access passes. This required greater reliance on the network access than was required for the other two entities.
• The use of network access by the Treasury staff was inconsistent with our assumption that network access login would occur on a daily basis and not retained over multiple days as was advised by the entity.
• The disparate and disperse nature of the Department of Home Affairs workforce means that: not all staff are required to regularly use physical and network access; and the complexity in obtaining all the physical access data for the various locations and associated building access management firms was considerable and unachievable within the timeframe of this audit.

4.58 Consequently, the results of this analysis is not reported.

4.59 Entities could consider the use of available access data records to analyse the accuracy of staff attendance and leave records. Automating this analysis could provide an efficient and effective solution and complement the assurance being obtained from supervisors.

4.60 The Protective Security Policy Framework (PSPF) assists Australian Government entities to protect their people, information and assets. It sets out government protective security policy and supports effective implementation of the policy by entities across the following outcomes: security governance; information security; personnel security; and physical security. PSPF Infosec 9 Access to information includes the following recommendations⁵⁸:

• Control access to operating systems through a secure log-on procedure.
• Display restricted access and authorised use only (or equivalent) warnings upon access to all entity ICT systems, and shut down inactive sessions after a defined period of inactivity.
• Consider restricting connection times to provide additional security for high-risk applications.

4.61 Benefits of logging out of a network and shutting down a computer include: timely receipt and installation of patches which enhance security and performance; negating the risk of power surges and network outages causing damage or loss of information; and reduced risk of unauthorised access. Unauthorised access can be obtained by a variety of measures including ‘brute force’ exploitation of weak passwords⁵⁹, use of memory when a BitLocker Drive Encryption or similar is enabled on the hard drive or when the machine is placed in sleep, hibernation or hybrid sleep states.

4.62 While the Departments of Home Affairs and the Prime Minister and Cabinet have policies and guidance that require logging off the network and shutting down of computers each day, the Treasury does not. There would be benefit in the Treasury establishing policies to enhance the security of its network and systems therein and to further facilitate investigations should a security issue arise.

Accuracy of leave accruals and adjustments

4.63 For each of the entities selected, for the purpose of assessing the accuracy of leave accruals and adjustments the ANAO has tested and obtained reliance on:

• information technology general controls. This encompasses access controls, change management and operational controls, and provides assurance over the reliability of data and reports, automated controls and functionality underlying business processes; and
• information technology application controls. These controls provide assurance over: application change management; business continuity; user access and privileged user management; and whether data is completely and accurately captured, processed and maintained. Aurion is used by the Department of the Prime Minister and Cabinet and the Treasury, while SAP-HR is used by the Department of Home Affairs.

4.64 The application controls testing included procedures relating to:

• consistency of the configuration of applications with workplace agreement conditions for staff leave including accrual of benefits for full-time and part time officers;
• effectiveness of leave approval controls;
• accuracy of deductions of approved leave from individual balances; and
• accuracy of financial value calculations.

4.65 The above testing has provided assurance that leave balances accurately report the accrual of entitlement and adjustment for periods of leave requested by officers and complements the analysis that has been performed across the various leave types.

4.66 From a financial reporting perspective, no material errors were identified.

Monitoring controls and reporting

4.67 The establishment of effective monitoring controls and reporting is particularly important in the management of staff leave due to the significance, number and complexity of requirements, conditions and related policy. The strength of such controls facilitates:

• the validation of rates of compliance, which is important given the reliance on supervisors as the primary control;
• targeted responses for non-compliance and management of human resources; and
• effective planning and utilisation of human resources.

4.68 Monitoring controls that are consistent across the three entities include:

• the use of a HRMIS to record, accrue and monitor leave. The use of the HRMIS facilitates significant reliance on automated or IT dependent controls. Automated controls apply established pre-conditions and all leave transactions require manager approval;
• localised management of staff, leave and attendance; and
• HRMIS functionality that supports the production of reports to manage staff leave.

4.69 Entity specific monitoring controls and reporting were detailed in Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities and summarised in Table 4.8 and complement other controls and reporting detailed in earlier paragraphs.

Table 4.8: Entity specific leave management monitoring controls and reporting

Source: ANAO analysis of entity monitoring controls and reporting.

4.70 Through the analysis of compliance with entity conditions provided in paragraphs 4.17 – 4.66, the ANAO has identified instances of non-compliance with policy and guidance that was not previously identified by entities. The prevalence of identified instances and the risks these represent, indicate scope exists for enhanced monitoring controls and reporting by entities. This would facilitate timely response to risks as they arise and enhance the management of human resources.

Note a: Three subsidiary entities classified by the Department of Finance as material are consolidated into parent entities. These entities are: ANSTO Nuclear Medicine Pty Ltd (consolidated into Australian Nuclear Science and Technology Organisation; CSIRO General Partner Pty Ltd (consolidated into Commonwealth Scientific and Industrial Research Organisation); and Voyages Indigenous Tourism Australia (consolidated into Indigenous Land and Sea Corporation).

5.0.1 A central element of the ANAO’s financial statements audit methodology, and the focus of the planning phase of the ANAO audits, is a sound understanding of an entity’s environment and internal controls relevant to assessing the risk of material misstatement in the financial statements. This understanding informs the ANAO’s audit approach, including the reliance that may be placed on entity systems to produce financial statements that are free from material misstatement. The interim phase of the audit assesses the operating effectiveness of controls. In the final audit phase the ANAO completes its assessment of the effectiveness of controls for the full year, substantively tests material balances and disclosures in the financial statements, and finalises its audit opinion on the entity’s financial statements.

5.0.2 In accordance with generally accepted auditing practice, the ANAO accepts a low level of risk that the audit procedures will fail to detect that the financial statements are materially misstated. This low level of risk is accepted because it is too costly to perform an audit that is predicated on no level of risk. Specific audit procedures are performed to ensure that the risk accepted is low. These procedures include:

• obtaining knowledge of the entity and its environment;
• reviewing the operation of internal controls;
• undertaking analytical reviews;
• testing a sample of transactions and account balances and/or conducting data analytics over entire populations; and
• confirming significant year end balances with third parties.

5.0.3 Where a performance audit was tabled during 2019–20 that was relevant to the financial management or administration of an entity, the impact of those observations on the audit approach will be discussed within the relevant portfolio section. The observations of performance audits tabled since 1 July 2020 and relevant to the financial management or administration of entities will inform the ANAO’s 2020–21 financial statements audits risk identification process.

5.0.4 Figure 5.0.1 provides each portfolio’s contribution, as a percentage of the Australian Government’s 2019–20 Consolidated Financial Statements (CFS).

Figure 5.0.1: Portfolio’s contribution as a percentage of the Australian Government’s 2019–20 Consolidated Financial Statements

 

 

Source: ANAO analysis of 2019–20 CFS.

5.0.5 This chapter reflects portfolio arrangements at 30 June 2020 as established by the December 2019 Administrative Arrangements Order and outlines the following information for each portfolio:

• an overview including:
  • an analysis of income, expenses, assets and liabilities contributed to the 2019–20 CFS; and
  • a table of the number of audit differences reported to entities in the portfolio;
• for each material entity within the portfolio:
  • the primary role of the entity;
  • an overview of any significant financial management impact as a result of the COVID-19 pandemic;
  • a summary of financial performance that provides a comparison of the 2018–19 and 2019–20 key financial statement items and commentary regarding significant movements;
  • key areas of financial statements risk including those areas identified as key audit matters (KAM)⁶⁰; and
• the status of significant and moderate audit findings reported during 2019–20 and previous years for all entities.

5.0.6 Table 5.0.9 presents a summary of significant and moderate findings reported at 30 June 2020 and 30 June 2019 by portfolio and entity, including the number carried forward as unresolved from the previous year. The findings and associated recommendations were agreed by all entities with two exceptions relating to: the moderate⁶¹ audit finding reported to the Department of Home Affairs; and the moderate audit finding reported to Services Australia. Table 5.0.9 does not include significant legislative breaches. One significant legislative breach was reported in relation to the Northern Land Council (paragraphs 5.12.54 – 5.12.60).

Table 5.0.9: Significant and moderate audit findings by portfolio and entity

Note a: Minor findings identified previously and reclassified to a moderate or significant finding are considered new for the purposes of this table.

Note b: Repeat/unresolved findings are categorised as such if unresolved from a prior financial year. Findings transferred to another entity as a result of machinery of government changes which remain unresolved are treated as repeat findings for the purposes of this table.

Note c: 2018–19 figures include two findings that were identified in the former Department of Employment, Skills, Small and Family Business.

Note d: 2018–19 figures are findings that were identified in the former Department of Communications and the Arts.

Source: 2019–20 and 2018–19 ANAO correspondence.

5.1 Agriculture, Water and the Environment portfolio

Portfolio overview

5.1.1 The Agriculture, Water and the Environment portfolio is responsible for advising the government and implementing programs with respect to the environment, meteorological services, and Australia’s agricultural, fisheries, food, forestry and water resources industries. The portfolio is also responsible for protecting matters of national environmental significance and protecting Australia’s animal and plant health status to maintain overseas markets and protect the economy and environment from the impact of exotic pests and diseases.

5.1.2 As a result of the Administrative Arrangement Order effective 1 February 2020, the Department of Agriculture, Water and the Environment was created from a merger of the Department of Agriculture and the environment functions from the Department of the Environment and Energy.

5.1.3 Figure 5.1.1 shows the Agriculture, Water and the Environment portfolio’s income, expenses, assets and liabilities.

Figure 5.1.1: Agriculture, Water and the Environment portfolio’s income, expenses assets and liabilities

 

 

Source: 2019–20 CFS.

5.1.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.20 – 2.21. The analysis included a summary of the total number of audit differences reported to entities during the 2019–20 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Agriculture, Water and the Environment portfolio.

Table 5.1.1: The number of audit differences for entities in the Agriculture, Water and the Environment portfolio

Source: Audit differences reported to entities in the DAWE Portfolio.

5.1.5 The following section provides a summary of the 2019–20 financial statements audit results for the Department of Agriculture, Water and the Environment, other material entities and findings related to non-material entities in the portfolio.

Department of Agriculture, Water and the Environment

5.1.6 The Department of Agriculture, Water and the Environment (DAWE) is responsible for developing and implementing policies and programs to promote more sustainable, productive, internationally competitive and profitable Australian agricultural, food and fibre industries; safeguarding Australia’s animal and plant health; managing the conservation, protection and sustainability of Australia’s natural resources, biodiversity, ecosystems, environment and heritage; advancing Australia’s interests in the Antarctic; and improving the health of rivers and freshwater ecosystems and water use efficiency.

5.1.7 Consistent with the Australian Government’s response to the Australian Bushfires and the COVID-19 pandemic, DAWE has implemented a number of measures aimed at supporting members of the Australian public who are likely affected by the these events. These measures included a range of stimulus packages for:

• Bushfire Response Package – Bushfire Wildlife Recovery Program;
• Additional Support for Farm Household Support Income Support Recipients (Coronavirus supplement);
• COVID-19 Response Package; and
• COVID-19 Economic Stimulus – Stimulus Payments (Payments to Households to support growth).

5.1.8 Payments for these measures commenced from during quarter three and four of 2019–20 and will continue into the 2020–21 financial year where applicable.

Summary of financial performance

5.1.9 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by DAWE, and includes commentary regarding significant movements between years contributing to overall performance.

5.1.10 As a result of the Administrative Arrangements Orders that commenced on 1 February 2020, all functions of the former Department of Agriculture (DoA) were transferred to the renamed Department of Agriculture, Water and the Environment and the environment functions and energy functions of the former Department of the Environment and Energy (DoEE) were transferred to the Department of Industry, Science, Energy and Resources. As a result of this change, DAWE prepared financial statements in 2019–20 that encompassed the results of both Agriculture and Environment as consolidated balances for the period 1 July 2019 to 30 June 2020.

Table 5.1.2: Key departmental financial statements items

Note a: The 2018–19 comparative figures displayed are for the former DoEE and DoA.

Source: DAWE’s audited financial statements for the year ended 30 June 2020.

5.1.11 Total net cost of services has remained consistent with the following offsetting movements:

• revenue from contracts with customers was $35.5 million lower compared to the prior year, due to a combination of factors including a decrease in import and export cost recovery charges that occurred with imports and exports declining post the COVID-19 pandemic, the termination of a service order with the Department of Home Affairs for an aircraft sub-lease for travel to and from Antarctica and a reduction in COAG Energy Council contribution revenue as a result of the transfer of the energy function; and
• a reduction in expenses relating to the provision for restoration obligations in the Antarctic. As at 30 June 2019, there was a large increase in key economic and engineering assumptions, such as shipping costs, particularly in relation to Antarctic solid waste disposal sites. There was a smaller increase in these assumptions as at 30 June 2020.

5.1.12 Total assets increased by $523.5 million primarily due to the initial application of AASB 16 Leases (AASB 16) and the associated right-of-use assets of $420.4 million and the capitalisation of $25.2 million for the build of the new Antarctic icebreaker, the RSV Nuyina, which is expected to commence science and resupply operations in 2021.

5.1.13 Total liabilities increased by $453.5 million primarily due to the recognition of finance lease liabilities of $425.5 million on initial application of AASB 16. In addition, the provision for restoration obligations in the Antarctic increased by $43.2 million. This increase reflects a lower discount rate compared to the prior year and unwinding of the provision due to the passage of time.

Table 5.1.3: Key administered financial statements items

Note a: The 2018–19 comparative figures displayed are for the former DoEE and DoA.

Source: DAWE’s audited financial statements for the year ended 30 June 2020.

5.1.14 DAWE manages water entitlements to achieve the Government’s environmental policy objectives. As a result of the Machinery of Government changes, the accounting treatment for water entitlements changed. The former DoA recognised the transfer of water entitlements to the former DoEE as expenses and the former DoEE recognised the receipt of the water entitlements as resources received free of charge. As water entitlements are now wholly managed by DAWE, the inter-entity transfer no longer occurs.

5.1.15 The decrease in total expenses due to water entitlement transfers, as discussed above, was partially offset by an increase in the concessional loan discount expense of $121.2 million. The higher concessional loan expense reflects the increased volume of loan commitments made by the Regional Investment Corporation in 2019–20 and an increase in the average concessional discount applied to each loan, due to the two year interest free period offered on most loans.

5.1.16 The decrease in total income was also partly due to a $94.1 million decline in agricultural levies and charges, reflecting lower production and prices as a result of environmental factors such as drought and fire, and economic factors such as exchange rates, demand and supply and the COVID-19 pandemic.

5.1.17 Total assets administered on behalf of the Government decreased by $20,389.1 million due to the transfer of the energy functions to the Department of Industry, Science, Energy and Resources.

Key areas of financial statements risk

5.1.18 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DAWE’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.1.4, including areas which were considered Key Audit Matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.1.4: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and DAWE’s audited financial statements for the year ended 30 June 2020.

Audit results

5.1.19 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.1.5: Status of audit findings

Note a: The moderate audit finding was first reported to Parliament in Auditor-General Report No.46 of 2018–19 Interim Report on Key Financial Controls of Major Entities. It was transferred from the former Department of Agriculture and relates to processes now facilitated by DAWE following the machinery of government changes.

Source: ANAO 2019–20 audit results.

5.1.20 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that DAWE’s 2019–20 financial statements were not materially misstated.

Resolved moderate audit finding

Weaknesses in change management controls

5.1.21 Change management is a key component of the control environment, supporting the controlled progression of changes to systems and processes. During 2018–19 the ANAO identified weaknesses in change management controls, including:

• instances where there was no documented evidence demonstrating system changes had been tested in the production environment;
• no evidence of controls around configuration management. Configuration management controls are important as they help ensure that that only approved and tested versions of software are implemented into the production environment;
• no evidence that a change migrated from the test environment to the production environment was performed by different users; and
• an increase to the percentage of changes implemented by the department using the emergency change procedures.

5.1.22 DAWE implemented a revised change management policy in October 2019 that addressed the effective design of change management controls. The revised change management controls were implemented during 2019–20. As part of the final audit phase, testing performed over a sample of changes confirmed that the change management controls were operating effectively. The ANAO has assessed that this finding has been appropriately resolved.

Bureau of Meteorology

5.1.23 The Bureau of Meteorology is responsible for gathering weather, water and atmospheric observations in order to provide forecasts, warnings and long-term weather and climatic outlooks.

Summary of financial performance

5.1.24 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by the Bureau of Meteorology, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.1.6: Key departmental financial statements items

Source: Bureau of Meteorology’s audited financial statements for the year ended 30 June 2020.

5.1.25 Net cost of services increased as a result of an increase in depreciation expenses for the current year due to the recognition of $118.6 million in right-of-use assets as a result of the application of AASB 16. This was partially offset by a decrease in employee expenses, in particular leave and other entitlements and an increase in the capitalisation of staffing costs related to capital projects.

5.1.26 The increase in revenue from government was a result of new funding in respect of the New Policy Proposal related to the Disaster Preparedness Initiative and additional funding of $23.0 million to supplement the loss of income from the suspension of the aviation sector in response to the COVID-19 pandemic.

5.1.27 The increase in total assets predominantly relates to an increase in non-financial assets of $276.6 million. The increase includes the recognition of $118.6 million of right-of-use assets in accordance with AASB 16, a revaluation increment of $58.9 million from an independent valuation of property, plant and equipment, and $203.7 million additions of plant and equipment and intangibles in 2019–20 as part of an on-going improvement in BOM’s ICT systems and business processes. This was partially offset by a $12.3 million decrease in appropriation receivables.

5.1.28 Total liabilities have predominately increased due to first time recognition of lease liabilities of $123.8 million.

Table 5.1.7: Key administered financial statements items

Source: Bureau of Meteorology’s audited financial statements for the year ended 30 June 2020.

5.1.29 In 2018–19 the Bureau ceased activities in relation to the sale of third party advertising which was reported as administered activities. There has been no further administered activity in 2019–20.

Key areas of financial statements risk

5.1.30 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Bureau of Meteorology’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.1.8. No significant or moderate audit findings were identified relating to these key areas of risk. No financial statements risks were identified relating to the COVID-19 pandemic.

Table 5.1.8: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and Bureau of Meteorology’s audited financial statements for the year ended 30 June 2020.

Audit results

5.1.31 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.1.9: Status of audit findings

Note a: The moderate audit finding relating to underpayment of superannuation on certain allowances was first reported to Parliament in Auditor-General Report No.20 of 2019–20 Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2019. This was downgraded to a minor audit finding in 2019–20.

Source: ANAO 2019–20 audit results.

Resolved moderate audit finding

Underpayment of superannuation on certain allowances

5.1.32 During 2018–19, the Bureau of Meteorology received legal advice that confirmed an employee was entitled to a superannuation payment in relation to rent-free accommodation that had been received during their employment. During 2019–20, the Bureau of Meteorology settled this matter and put in place policies and procedures to address the on-going risk of underpayment of superannuation on certain allowances.

5.1.33 The Bureau of Meteorology is continuing to progress the assessment of the value of the potential impact of underpayment of superannuation in relation to other former and current employees. The finalisation of the assessment remains as a minor finding.

Comments on non-material entities

Director of National Parks

5.1.34 The Director of National Parks (DNP) is responsible for the sustainable management of the Commonwealth’s protected areas through conservation and appreciation of Commonwealth reserves. The DNP achieves its objectives through the provision of safe visitor access, the control of invasive species, and working with stakeholders and neighbours.

Resolved moderate audit finding

5.1.35 This finding was first raised during the interim phase of the 2016–17 audit after undertaking site visits to the Kakadu and Booderee National Parks. The ANAO identified weaknesses in the identification, classification and valuation of assets and that the Kakadu National Park did not have an approved and implemented capital maintenance plan for the upkeep of its roads. This audit issue remained unresolved in 2018–19 financial year.

5.1.36 During the 2019–20 financial year, DNP made significant progress by developing an Asset Management Policy and Strategy, including Asset Management and Maintenance Plans. As a result of these actions this audit issue was downgraded to a minor audit finding in the 2019–20 audit process. The ANAO will assess the effectiveness of DNP’s implementation of new asset management policy, strategy and road maintenance plans during the 2020–21 financial statements audit.

Great Barrier Reef Marine Park Authority

5.1.37 The Great Barrier Reef Marine Park Authority (the Authority) is a non-corporate Commonwealth entity and operates as a statutory agency under the Great Barrier Reef Marine Park Act 1975. The Authority is responsible for the long-term protection of the Great Barrier Reef for all Australians and the international community through the care and development of the Marine Park.

New moderate audit finding

Expenditure control environment

5.1.38 As part of the 2019–20 financial statements audit, the ANAO tested the operational effectiveness of controls related to procurement processes and IT access controls. The following weaknesses were identified:

• purchase requisitions to confirm the approval of the commitment of public money did not exist in several instances;
• evidence did not exist to confirm that expenditure incurred for employment agency suppliers had been reviewed or approved by a financial delegate confirming that the services had been rendered prior to payment;
• documentation did not exist to confirm that changes to employee and supplier masterfile data are reviewed on a regular basis by an independent reviewer; and
• access rights associated with the financial institution online platform were not reviewed and the vendor payment file was not securely stored prior to uploading to the financial institution online platform.

5.1.39 The weaknesses identified increase the risk of fraud and or error in the expenditure control environment. The ANAO recommended the Authority review current processes to confirm that invoices are evidenced as reviewed and approved for prior to payment; and access and security of data be reviewed so that access to payment files and the online banking platform are appropriately managed to protect the integrity of the payment function.

5.1.40 The Authority agreed to the recommendation and advised during the final phase of the audit that they had commenced remedial action to strengthen the control framework. The ANAO will assess the Authority’s progress in resolving the finding as part of the 2020–21 financial statements audit.

Rural Industries Research and Development Corporation

5.1.41 The Rural Industries Research and Development Corporation (trading as ‘AgriFutures’) was established to increase knowledge that fosters sustainable, productive and profitable new and existing rural industries and further understanding of national rural issues through research and development in government-industry partnership. AgriFutures receives matching funding from the Department of Agriculture, Water and the Environment based on sections of the Primary Industry Research & Development Act 1989.

Emphasis of matter

5.1.42 The auditor’s report for AgriFutures’ financial statements included an emphasis of matter paragraph to draw attention to the correction of a prior period error. Sections of the legislation providing the matching funding were applied incorrectly between 2014–15 and 2018–19 and resulted in underpayment to AgriFutures. $21.4 million was received in 2019–20 to resolve the underpayment. Corrections were made to the 2018–19 revenue from government, trade and other receivables and equity.

5.2 Attorney-General’s portfolio

Portfolio overview

5.2.1 The Attorney-General’s portfolio responsibilities encompass legal services; national security; industrial relations; work health and safety; rehabilitation and compensation; integrity and anti-corruption matters; the Commonwealth justice system including courts, tribunals, justice policy and legal assistance; regulation and reform; protecting and promoting human rights; government records management; and support for Royal Commissions.

5.2.2 The Attorney-General’s Department (AGD) is the lead entity in the portfolio. Following the machinery of government changes announced in May 2019, AGD is responsible for Australia’s law, justice, and integrity frameworks and facilitating jobs growth through policies and programs that promote fair, productive and safe workplaces. Through the Australian Government Solicitor, AGD also provides legal services to the Commonwealth.

5.2.3 Figure 5.2.1 shows the Attorney-General’s portfolio’s income, expenses, assets and liabilities.

Figure 5.2.1: Attorney-General’s portfolio’s income, expenses, assets and liabilities

 

 

Source: 2019–20 CFS.

5.2.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.20 – 2.21. The analysis included a summary of the total number of audit differences reported to entities during the 2019–20 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Attorney-General’s portfolio.

Table 5.2.1: The number of audit differences for entities in the Attorney-General’s portfolio

Source: Audit differences reported to entities in the Attorney General’s Portfolio.

5.2.5 The following sections provide a summary of the 2019–20 financial statements audit results for the AGD, other material entities and findings related to non-material entities in the portfolio.

Attorney-General’s Department

5.2.6 The role of the AGD is to contribute towards a just and secure society though the maintenance of Australia’s law, justice, and integrity frameworks and to facilitate jobs growth through policies and programs that promote fair, productive and safe workplaces. This work helps people to thrive and succeed in a prosperous, fair and cohesive nation. AGD also supports the Attorney-General as the First Law Officer to protect and promote the rule of law, to provide strong oversight and accountability and to act as the principal legal advisor to government.

Summary of financial performance

5.2.7 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by AGD, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.2.2: Key departmental financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2020.

5.2.8 The increase in revenue from government of $81.9 million is primarily due to the transfer of industrial relations functions and programs following the machinery of government changes of 29 May 2019. Net cost of services increased by $96.5 million due to an increase in employee benefits expenses and the proportional increase in leave and other entitlements; increases in depreciation expenses relating to the recognition of the right-of-use assets and act of grace payments.

5.2.9 Total assets increased mainly due to right-of-use assets valued at $322.5 million following the introduction of AASB 16; a $36.3 million increase in appropriation receivables includes the impact of the transfer of industrial relations functions and programs; and a $10.3 million increase in cash and cash equivalents.

5.2.10 Total liabilities increased due to:

• $329.3 million of lease liabilities following the introduction of AASB 16; this was offset by a $24.7 million reduction in operating lease expenses which contributed to the decrease in supplier payables; and
• a $30.5 million increase in employee provisions is primarily a result of an increase in staff numbers associated with the transfer of industrial relations functions combined with the impact from the 2019–20 actuarial review of employee liabilities.

Table 5.2.3: Key administered financial statements items

Source: AGD’s audited financial statements for the year ended 30 June 2020.

5.2.11 Total expenses increased as a result of a number of factors including:

• an increase of $148.3 million in personal benefit expenses relating to payments under the fair entitlements guarantee special appropriation to provide financial assistance to certain unpaid employment entitlements;
• an increase of $135.6 million in levies expenditure driven by the transfer of industrial relations functions and programs;
• an increase of $101.0 million for administered grant expenses primarily relating to the Family Relationships Services Program and payments from special appropriations for the Safety and Rehabilitation and Compensation Act 1998 and asbestos related claims;
• $55 million payments to Comcare to fund claims relating to asbestos and safety, rehabilitation and compensation matters; and
• $14.2 million increase in employee benefits reflecting the full year impact of the Disability Royal Commission and the Bushfire Royal Commission.

5.2.12 Total income has increased largely due to a $135.2 million increases in levies revenue relating to the collection of payroll levy from employers under the Coal Mining Industry (Long Service Leave) Payroll Levy Collection Act 1992 and a $136.6 million increase in personal benefit recoveries representing amounts recovered by the fair entitlements guarantee recovery team from pursuing directors and auditors to reimburse payments made under the scheme.

5.2.13 Total assets decreased primarily due to a reduction in investments in particular the investment in the Coal Mining Industry (Long Service Leave Funding) Corporation which decreased by $165.4 million. Total liabilities decreased as a result of a reduction in the amount of payables by the Commonwealth to Comcare for worker’s compensation claims of $98.0 million.

Key areas of financial statements risk

5.2.14 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of AGD’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.2.4. No significant or moderate audit findings were identified relating to these key areas of risk.

5.2.15 As part of the year-end audit the ANAO reviewed IT general controls and key governance and assurance processes established by the AGD to manage the changes in response to the COVID-19 pandemic.

Table 5.2.4: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and AGD’s audited financial statements for the year ended 30 June 2020.

Audit results

5.2.16 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

Coal Mining Industry (Long Service Leave Funding) Corporation

5.2.17 The Coal Mining Industry (Long Service Leave Funding) Corporation (Coal LSL) collects levies from employers to fund long service leave payments made to employees in the Australian black coal mining industry. The levies collected are invested until the employee takes long service leave, at which point the employer makes a payment to the employee and seeks reimbursement from Coal LSL in accordance with legislative arrangements.

Summary of financial performance

5.2.18 The following section provides a comparison of the 2018–19 and 2019–20 key financial statements items reported by Coal LSL, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.2.5: Key financial statements items

Source: Coal LSL’s audited financial statements for the year ended 30 June 2020.

5.2.19 The net cost of services increase is mainly due to the decrease of $112.2 million in investment revenue as a result of changes in the fair value of investments and interest income from unit trust investments as a result of impacts that included the COVID-19 pandemic. This was slightly offset by the decrease of $24.7 million in total expenses as a result of a lower increase in the Coal long service leave provision compared to 2018–19.

5.2.20 Total liabilities increased primarily due to a $191.3 million increase in provisions as a result of coal workers accruing more leave in 2019–20 and the decrease of the 5 year government bond rate used in calculating the value of the provision.

Key areas of financial statements risk

5.2.21 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Coal LSL’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.2.6. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.2.6: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and Coal LSL’s audited financial statements for the year ended 30 June 2020.

Audit results

5.2.22 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

Comcare

5.2.23 Comcare is responsible for the administration of an integrated safety, rehabilitation and compensation scheme for federal employers, employees and their representatives. Comcare aims to support participation and productivity nationally, through healthy and safe workplaces that minimise the risk of harm. This also includes the management of a comprehensive workers’ compensation scheme and the Commonwealth common law liabilities for asbestos compensation.

Summary of financial performance

5.2.24 The following section provides a comparison of the 2018–19 and 2019–20 key financial statements items reported by Comcare, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.2.7: Key financial statements items

Source: Comcare’s audited financial statements for the year ended 30 June 2020.

5.2.25 The decrease in the net contribution by services was largely due to a reduction in revenue from contracts with customers of $78.5 million primarily attributable to premium revenue that is no longer collected from the Australian Capital Territory (ACT) Government. This is offset by an increase of $42.5 million attributable to changes in gains arising from the movements of workers’ compensation claims and asbestos-related disease claims provisions. These gains reflect changes in economic assumptions including inflation and discount rates impacting on the actuarial valuation.

5.2.26 Comcare has arrangements for special appropriations funding for claims to be returned to the Commonwealth when it is surplus to Comcare’s requirements, after third party recoveries. This is reflected in the decrease in the available funding from movement in claims provision.

5.2.27 Total assets decreased primarily due to a reduction of $98.0 million in appropriations receivable, mainly attributed to a decrease in common law asbestos-related disease claims provision.

5.2.28 The reduction in total liabilities was mainly due to a decrease of $107.3 million in the common law asbestos-related disease claims provision as a result of the current year actuarial valuation.

Key areas of financial statements risk

5.2.29 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Comcare’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.2.8. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.2.8: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and Comcare’s audited financial statements for the year ended 30 June 2020.

Audit results

5.2.30 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

High Court of Australia

5.2.31 The High Court of Australia (the Court) is responsible for interpreting and applying the law of Australia; deciding on cases of special federal significance, including challenges to the constitutional validity of laws; and hearing appeals, by special leave, from federal, state and territory courts.

Summary of financial performance

5.2.32 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by the Court, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.2.9: Key financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2020.

5.2.33 The decrease in the total comprehensive loss attributable to the Australian Government related to revaluations which did not increase significantly compared to prior year.

Table 5.2.10: Key administered financial statements items

Source: The High Court’s audited financial statements for the year ended 30 June 2020.

5.2.34 The Court’s administered income relates to its hearing and filing fees. The hearing and filing fees remained relatively stable between 2018–19 and 2019–20, reflecting normal business activities. The increase in liabilities is a result of the transition to AASB 15 Revenue from Contracts with Customers which resulted in the recognition of unearned income associated with hearing fees.

Key areas of financial statements risk

5.2.35 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the Court’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.2.11. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.2.11: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and the High Court’s audited financial statements for the year ended 30 June 2020.

Audit results

5.2.36 The following table summarises the status of the audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.2.12: Status of audit findings

Source: ANAO 2019–20 audit results.

New moderate audit findings

Security management

5.2.37 Maintaining and supporting IT systems requires some user accounts, both at the network and the application level, to have extensive access rights (privileged access). Privileged user accounts can be used to circumvent security controls to make direct changes, either to system settings or systems data, or to access files and accounts used by others.

5.2.38 The ANAO identified a number of weaknesses in the effectiveness of the High Court’s management of privileged users and access controls as part of the interim audit, including:

• a review of activities performed by privilege users was not performed;
• privileged accounts had internet access;
• processes were not implemented to revalidate that standard access to systems remained appropriate;
• instances where individuals were provided with privilege user access to the financial management information system (FMIS) to perform routine operations; and
• non-compliance with the Court’s password policy.

5.2.39 During the final audit, the ANAO confirmed that separate user accounts had been established for the users of the financial management information system (FMIS), the Court had implemented monitoring controls in relation to the activities performed by the privileged users in the FMIS and that a network change had occurred to ensure compliance with the Court’s password policy.

5.2.40 The Court advised the ANAO that they will investigate the implementation of security changes that will negate the need for administrator accounts to have access to the internet. The Court also advised that management will consider the implementation of a review for activities performed by privileged users and the implementation of processes to confirm that users continue to have appropriate access to systems, applications and data in line with business requirements.

Change management

5.2.41 Change management is a critical component of the information technology (IT) control environment, supporting the controlled progression of changes to IT systems. The implementation of a change management process provides management with assurance that data and calculations within systems that support decision-making and financial reporting can be relied upon.

5.2.42 As part of the interim audit, the ANAO identified that processes to formally review the change management register were not implemented. The ANAO also noted that the activities of two generic user accounts to implement changes were not logged and monitored.

5.2.43 During the final audit, the ANAO confirmed that the generic user accounts had been disabled. The ANAO were advised by the Court that the change register will be reviewed on a monthly basis for appropriateness and completeness. The ANAO will review these processes as part of the 2020–21 financial statement audit.

National Archives of Australia

5.2.44 The National Archives of Australia has four main roles under the Archives Act 1983: to promote sound records management by Australian Government entities by providing and setting standards for the management of information and records; to authorise the retention and disposal of records; to preserve records of national archival value; and to make material publicly available.

Summary of financial performance

5.2.45 The following section provides a comparison of the 2018–19 and 2019–20 key financial statements items reported by the National Archives, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.2.13: Key financial statements items

Source: The National Archive’s audited financial statements for the year ended 30 June 2020.

5.2.46 Net cost of services increased due to the changes from AASB 16 including an increase in depreciation of $23.1 million on right-of-use assets, increase in finance costs of $12.0 million on lease liabilities offset by a reduction of operating lease rentals.

5.2.47 The movement in asset and liabilities is primarily due to the initial recognition of right- of-use assets of $486.4 million and leases liabilities $495.1 million in 2019–20. Movements in other balances reflect normal business activities.

Key areas of financial statements risk

5.2.48 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of the National Archive’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2019–20 is provided in Table 5.2.14. No significant or moderate audit findings were identified relating to the key area of risk.

Table 5.2.14: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and the National Archive’s audited financial statements for the year ended 30 June 2020.

Audit results

5.2.49 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

5.3 Defence portfolio

Portfolio overview

5.3.1 The Defence portfolio includes a number of entities that together are responsible for the defence of Australia and its national interests. The principal entities within the Defence portfolio are the Department of Defence, the Australian Signals Directorate and Defence Housing Australia. The portfolio also contains the Department of Veterans’ Affairs (DVA) and associated bodies, including the Australian War Memorial (AWM). DVA is the primary service delivery entity with responsibility for implementing programs to assist the veteran and ex-service communities.

5.3.2 The Department of Defence, including the Australian Defence Force, is responsible for protecting and advancing Australia’s strategic interests through the promotion of security and stability, the provision of military capabilities to defend Australia and its national interests, and the provision of support for the Australian community and civilian authorities as directed by the Australian Government. In 2019–20, support for the community and civilian authorities included support to state and territory emergency authorities through Operation Bushfire Assist, including through a compulsory call-out of Reserve brigades; and a range of activities to support state and territory authorities during Operation COVID-19 Assist and related support provided by the department to other parts of the Australian Public Service.

5.3.3 Figure 5.3.1 shows the Defence Portfolio’s income, expenses, assets and liabilities.

Figure 5.3.1: Defence portfolio’s income, expenses, assets and liabilities

 

 

Source: 2019–20 CFS

5.3.4 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.20 – 2.21. The analysis included a summary of the total number of audit differences reported to entities during the 2019–20 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the Defence portfolio.

Table 5.3.1: The number of audit differences for entities in the Defence portfolio

Source: Audit differences reported to entities in the Defence portfolio.

5.3.5 The following sections provide a summary of the 2019–20 financial statements audit results for Defence and other material entities.

Department of Defence

5.3.6 Defence is responsible for protecting and advancing Australia’s strategic interests through the: promotion of security and stability; the provision of military capabilities to defend Australia and its national interests; and the provision of support for the Australian community and civilian authorities as directed by the Australian Government.

5.3.7 In support of the Australian Government’s response to the COVID-19 pandemic, Defence provided assistance with:

• Med-Con Pty Ltd in Victoria to increase surgical mask production;
• re-opening and supporting the North-West Regional Hospital in Tasmania;
• specialist technical support including diagnostic platform development, virus survivability and fate research, pandemic modelling and trials of a potential COVID-19 prophylactic; and
• contact tracing, and supporting quarantine arrangements and police border controls across the States and Territories.

Defence also supported COVID-19 response activities in the Pacific region through the Defence Cooperation Program.

Summary of financial performance

5.3.8 The following section provides a comparison of the 2018–19⁶² and 2019–20 key departmental and administered financial statements items reported by Defence and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.3.2: Key departmental financial statements items

Note a: Defence has had a prior year adjustment and Table 5.3.2 has been adjusted to reflect the changes.

Source: Defence’s audited financial statements for the year ended 30 June 2020.

5.3.9 Net cost of services increased mainly due to employee benefits which increased by $420.1 million due to a 1.3 per cent higher headcount and increased salary across APS staff and military personnel; as well as an increase in supplier expenses of $1.5 billion consistent with increased funding as part of Defence’s COVID-19 industry stimulus initiatives; and settlement of legal claims for $212.5 million.

5.3.10 Total assets increased mainly due to the recognition of the right-of-use assets on initial application of AASB 16 of $1.2 billion for building assets and $265.5 million for other plant and equipment. Asset additions of $11.0 billion have also been recognised, largely comprising of specialist military equipment of $8.8 billion. This has been partially offset by depreciation of $6.3 billion.

5.3.11 Total liabilities increased by $2.0 billion due to an increase in payables by $208.7 million as a result of increased project activity where there is a significant lead time between work being performed and invoice payments; the recognition of lease liabilities of $1.4 billion on initial application of AASB 16; and an increase in employee leave provisions by $371.3 million.

Table 5.3.3: Key administered financial statements items

Note a: Defence has had a prior year adjustment and Table 5.3.3 has been adjusted to reflect the changes.

Source: Defence’s audited financial statements for the year ended 30 June 2020.

5.3.12 Total expenses increased due to a $1.4 billion increase in employee benefit expenses as a result of interest rates falling throughout the year.

5.3.13 Total assets decreased mainly due to a reduction in the value of the Commonwealth’s investment in Defence Housing Australia of $177.5 million.

5.3.14 Administered liabilities increased due to an $8.8 billion increase within the Military Superannuation and Benefits Scheme provision as a result of the ongoing accrual of benefits and interest and changes in economic assumptions, including the reduction in the discount rate. This increase has been partially offset by a decrease in the Defence Force Retirement and Death Benefits Scheme provision of $3.5 billion as a result of changes to the actuarial assumptions used to calculate the provision and lower pension increases than assumed.

Key areas of financial statements risk.

5.3.15 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Defence’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.3.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

Table 5.3.4: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and Defence’s audited financial statements for the year ended 30 June 2020.

5.3.16 The following performance audits reports were tabled during 2019–20 and were relevant to the financial management or administration of Defence:

• Auditor-General Report No.6 2020–21 Design and Implementation of the Defence Export Strategy;
• Auditor-General Report No.24 2019–20 Defence’s Management of its Public Communications and Media Activities;
• Auditor-General Report No.22 2019–20 Future Submarine Program—Transition to Defence; and
• Auditor-General Report No.19 2019–20 2018–19 Major Projects Report.

5.3.17 These reports identified issues around the governance, risk management and quality assurance practices of Defence. Similar issues were noted in the financial statements audit and have been raised as minor findings involving a number of key accounting and business processes.

Audit results

5.3.18 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.3.5: Status of audit findings

Note a: The significant audit finding was downgraded to a moderate audit finding during the 2019–20 interim audit phase. A discussion of this finding can be found in the Auditor-General Report No.38 2019–20 Interim Report on Key Financial Controls of Major Entities.

Source: ANAO 2019–20 audit results

5.3.19 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that Defence’s 2019–20 financial statements were not materially misstated.

New moderate audit finding

Segregation of duties deficiencies within the procurement function

5.3.20 During 2019–20, the ANAO identified a lack of segregation between the critical procurement functions involving the creation/modification of vendor data, the raising and approval of a purchase order, the goods receipting function, and the payment authorisation process. The segregation of duties weaknesses related to procurements which were not subject to panel arrangements. The lack of segregation of duties increases the risk of fraud and/or financial loss.

5.3.21 The ANAO recommended Defence implement a range of system automated controls to prevent officers from performing incompatible procurement functions. Defence has advised that it has already implemented a number of controls with effect from 1 July 2020. The ANAO will review these processes as part of the 2020–21 audit cycle.

Unresolved moderate audit findings

Management and monitoring of SME balances in ROMAN and MILIS

5.3.22 In 2017–18 the ANAO reported a number of issues with the substantiation of SME transactions in the Military Integrated Logistics Information System (MILIS) and the corresponding accounts in the financial management information system (ROMAN). Defence uses these systems to manage the acquisition and sustainment of SME assets. The issues identified included:

• delays in processing payments and receipts in ROMAN and MILIS;
• delays in validating MILIS transactions and reconciling to balances in the clearing accounts;
• payments and purchases posted to incorrect general ledger accounts and cost centres; and
• delays in transferring SME from assets under construction to the fixed asset register after confirmation of being in use by business units.

5.3.23 In 2019–20 Defence continued its remediation of this issue, by:

• matching a significant number of ROMAN and MILIS transactions and validating price differences between the two systems;
• undertaking a comprehensive review and remediation of a portion of the aged unreconciled balances between ROMAN and MILIS;
• implementing a number of controls for the ongoing monitoring of unvalidated transactions between ROMAN and MILIS; and
• improving the governance arrangements and monitoring over ROMAN and MILIS.

5.3.24 At the conclusion of the 2019–20 audit, there remained a large unreconciled variance between ROMAN and MILIS which requires further investigation and remediation. The ANAO will continue to monitor Defence’s progress in addressing this issue as part of the 2020–21 audit cycle.

Monitoring and management of accounts with privileged access

5.3.25 Maintaining and supporting IT systems requires that some individuals have privileged access rights. This level of access can be used to bypass security controls and make changes, either to system settings or directly to system data. Individuals with privileged access must be unique and identifiable, and have their activity regularly monitored to detect any unauthorised use.

5.3.26 The ANAO identified weaknesses in logging and monitoring controls over privileged user access across six financial processing systems which capture data used for financial statements preparation.

5.3.27 During 2019–20, Defence provided evidence to the ANAO showing that weaknesses in a number of its IT systems had been remediated. However, the ANAO noted that remediation for three key financial processing systems is planned for early 2021. The ANAO will review the implementation of Defence’s logging and monitoring controls in the remaining IT systems as part of the 2020–21 audit cycle.

Australian Signals Directorate

5.3.28 The purpose of the Australian Signals Directorate (ASD) is to defend Australia from global threats and advance Australia’s national interest through the provision of foreign signals intelligence, cybersecurity and offensive cyber operations, as directed by government. The Australian Cyber Security Centre, which is a part of ASD, provides support to government and the Australian community to improve Australia’s cyber resilience. ASD became a prescribed agency on 1 July 2018. Prior to this, ASD existed within the Department of Defence.

Summary of financial performance

5.3.29 The following section provides a comparison of the 2018–19 and 2019–20 key financial statements items reported by ASD and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.3.6: Key financial statements items

Source: ASD’s audited financial statements for the year ended 30 June 2020.

5.3.30 Net cost of services have increased mainly due to employee benefits expenses increasing by $22.4 million as a result of an increase in annual leave and average salaries; an increase in depreciation expenses reflecting the roll out of projects during the period; and an increase of $28.1 million in write down and impairment of assets due to review and remediation of work in progress which no longer meets the definition of an asset or capitalisation thresholds were no longer met.

5.3.31 Revenue from government increased as a result of new policy proposals being funded and indexation from the previous period.

5.3.32 Total assets and liabilities increased primarily due to the initial application of AASB 16 and the recognition of the associated right-of-use asset of $402.4 million and the corresponding lease liability of $379.6 million.

Key areas of financial statements risk

5.3.33 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of ASD’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in Table 5.3.7.

Table 5.3.7: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and ASD’s audited financial statements for the year ended 30 June 2020.

Audit results

5.3.34 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.3.8: Status of audit findings

Note a: The moderate audit finding was upgraded during 2019–20 from a minor audit finding identified during 2018–19.

Source: ANAO 2019–20 audit results.

5.3.35 For the finding listed below, the ANAO undertook additional audit procedures to gain assurance that ASD’s 2019–20 financial statements were not materially misstated.

New moderate audit finding

Asset Capitalisation and Monitoring Process

5.3.36 During 2018–19 the ANAO identified a minor audit finding relating to the asset management and accounting framework within ASD. This finding and recommendations made related to the development of a specific asset management and accounting framework relevant to ASD’s outcomes and financial statement preparation process on the creation of the agency as a standalone entity on 1 July 2018.

5.3.37 In the 2019–20 audit the ANAO identified an additional weakness in the asset management and accounting framework relating to assets under construction. At 30 June 2020 a material and large proportion of the asset under construction balance was identified as being completed, however, the necessary accounting process to transfer the assets developed to agency’s asset register had not occurred, but the assets had been operationally in service and being used by ASD. In order to accurately reflect depreciation expenses incurred on these in use assets ASD conducted a manual process to estimate the transfer of these assets to the asset register. The ANAO considers the timely transfer of assets under construction to the asset register as a key control that supports the accuracy and reliability of the financial statements, internal and external budget processes and effectiveness of the control over and custody of assets held.

5.3.38 The ANAO recommended that ASD implement additional (and more timely) monitoring procedures to identify completed assets under construction for transfer to the asset register and to undertake additional training and awareness activities to support asset custodians in meeting their financial management responsibilities. ASD have advised the ANAO it will undertake these remediation activities during 2020–21. The ANAO will review the effectiveness of these activities as part of the 2020–21 audit.

Australian War Memorial

5.3.39 The Australian War Memorial (AWM) is responsible for maintaining and developing the national memorial to Australians who have lost their lives in wars or warlike operations, developing, maintaining and exhibiting a national collection of historical material, and conducting and fostering research into Australian military history.

Summary of financial performance

5.3.40 The following section provides a comparison of the 2018–19 and 2019–20 key financial statements items reported by the AWM, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.3.9: Key financial statements items

Source: AWM’s audited financial statements for the year ended 30 June 2020.

5.3.41 The reduction in net cost of services was due to reductions in cleaning and travel expenses mainly associated with less activity due to the COVID-19 pandemic, slightly offset by an increase of own source revenue of $1.7 million mainly from an increase in donations and sponsorships. Revenue from government decreased by $4.5 million and includes the impact of the efficiency dividend.

Key areas of financial statements risk

5.3.42 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of AWM’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.3.10. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.3.10: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and AWM’s audited financial statements for the year ended 30 June 2020.

Audit results

5.3.43 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

Defence Housing Australia

5.3.44 Defence Housing Australia (DHA) is responsible for providing housing and related services to members of the Australian Defence Force and their families, consistent with Defence’s operational requirements. To meet these requirements, DHA is responsible for constructing, purchasing and leasing houses for Australian Defence Force personnel. Each year, DHA sells a portion of its properties through a sale and leaseback program, and those revenues are DHA’s primary source of capital funding to acquire new properties.

Summary of financial performance

5.3.45 The following section provides a comparison of the 2018–19 and 2019–20 key financial statement items reported by the DHA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.3.11: Key financial statements items

Source: DHA’s audited financial statements for the year ended 30 June 2020.

5.3.46 The decrease in income was mainly attributable to the decrease in sale of inventories as a result of holding back of inventory stock for investment purposes.

5.3.47 The decrease in total expenses related to the net impact of the decrease in housing services lease rentals and increase in depreciation and finance costs due to the initial application of AASB 16. In addition, there has been a decrease in the cost of inventories sold which correlates to the decrease in sales. This was offset by an increase in the write-down and impairment of assets as a result of divesting of property not required for Defence provisioning purposes.

5.3.48 The movement in asset and liabilities is primarily due to the initial recognition under AASB 16 of right-of-use assets in investment properties and property, plant and equipment of $1.6 billion and the increase in leases liabilities of $1.6 billion.

Key areas of financial statements risk

5.3.49 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DHA’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.3.12.

Table 5.3.12: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and DHA’s audited financial statements for the year ended 30 June 2020.

Audit results

5.3.50 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.3.13: Status of audit findings

Source: ANAO 2019–20 audit results.

Resolved moderate finding

Completeness and Accuracy of Lease Data

5.3.51 During 2018–19, DHA engaged a contract firm to perform an assessment of the completeness and accuracy of lease data. This initial sample assessment provided in a draft report identified some anomalies in relation to leasing data’s quality and internal controls. The contract firm engagement also identified a number of leases that were not able to be located for the purposes of testing. Data anomalies were noted in relation to approximately 9.3 per cent of the sample tested, a number of the errors identified related to fields which do not have a financial statements impact.

5.3.52 As a result, DHA commissioned the contract firm to utilise a technology solution to perform a full review of the lease data in relation to the entire lease portfolio (around 13,000 leases). This work had not been completed as at the date of signing of the 2018–19 financial statements.

5.3.53 As noted in 2018–19, on receipt of the results of the work performed on the entire lease portfolio, management would need to corroborate any data issues identified and update the underlying dataset to adjust for any corroborated inaccuracies to enable the calculation of the impact of the first time adoption of AASB 16. Management had developed a remediation plan and was implementing this plan in 2018–19 which was expected to be concluded in the 2019–20 financial year.

5.3.54 In 2019–20, the ANAO noted that management implemented preventative controls in order to prevent new errors from entering datasets, system enhancements to user access controls, the user interface and other control improvements which support, restrict and limit manual data entry and business process adjustments. The final error rate identified from the contract firm review was 2.6% with a net impact that was not material. These errors were subsequently corrected. Management was able to locate all the leases and therefore have considered that there has been no breach of section 41 of the Public Governance, Performance and Accountability Act 2013. Based on the above, this finding is now resolved.

Department of Veterans’ Affairs

5.3.55 The Department of Veterans’ Affairs (DVA) is responsible for developing and implementing programs to assist the veteran and ex-service communities. This includes: granting pensions, allowances and other benefits, and providing treatment under the Veterans’ Entitlements Act 1986; the administration of benefits and arrangements under the Military Rehabilitation and Compensation and the Safety, Rehabilitation and Compensation (Defence-related Claims) legislation; administering the Defence Service Homes Act 1918 and the War Graves Act 1980; and conducting commemorative programs to acknowledge the service and sacrifice of Australian servicemen and women.

Summary of financial performance

5.3.56 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by the DVA, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.3.14: Key departmental financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2020.

5.3.57 The movement in assets and liabilities is primarily due to the initial recognition of right-of-use assets of $116.6 million and lease liabilities of $117.6 million on implementation of AASB 16.

Table 5.3.15: Key administered financial statements items

Source: DVA’s audited financial statements for the year ended 30 June 2020.

5.3.58 The increase in total expenses of $778 million is mainly attributed to the increase in the military compensation provision of $768 million following an actuarial review and an increase in health care payments of $1.5 billion driven by increased claims by veterans.

5.3.59 The increase in total liabilities is due to the actuarial review of personal benefit and health care provisions of $10.8 billion and the increased as a result of changes in the discount rate.

Key areas of financial statements risk

5.3.60 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DVA’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.3.16, including the area which was considered to be Key Audit Matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.3.16: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and DVA’s audited financial statements for the year ended 30 June 2020.

Audit results

5.3.61 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

5.4 Education, Skills and Employment portfolio

Portfolio overview

5.4.1 The Education, Skills and Employment portfolio is responsible for creating an inclusive and prosperous Australia by maximising opportunity through education, skills (including training policy and regulation) and employment policy.

5.4.2 The Department of Education, Skills and Employment (DESE) is the lead entity in the portfolio and is responsible for ensuring Australians can experience the social wellbeing and economic benefits that quality education, skills and employment provide.

5.4.3 In May 2019, a machinery-of-government change transferred the skills and training functions from the Department of Education and Training to the Department of Employment, Skills, Small and Family Business, and transferred the industrial relations functions from the Department of Employment, Skills, Small and Family Business to the Attorney-General’s Department.

5.4.4 Effective 1 February 2020, a further machinery-of-government change consolidated the Department of Employment, Skills, Small and Family Business with the Department of Education, forming the Department of Education, Skills and Employment.

5.4.5 The main impacts of the COVID-19 pandemic on the operations of DESE include stimulus funding of $1.3 billion to support small business to retain their apprentices and trainees, and measures to reduce the financial pressures facing the early childhood sector.

5.4.6 Figure 5.4.1 shows the Education, Skills and Employment portfolio’s income, expenses, assets and liabilities.

Figure 5.4.1: Education, Skills and Employment portfolio’s income, expenses, assets and liabilities

 

 

Source: 2019–20 CFS.

5.4.7 An analysis of the quality and timeliness of financial statements preparation is included in chapter 2, paragraphs 2.20 – 2.21. The analysis included a summary of the total number of audit differences reported to entities during the 2019–20 financial statements audit. The following table provides a summary of those audit differences that relate to entities within the DESE portfolio.

Table 5.4.1: The number of audit differences for entities in the DESE portfolio

Source: Audit differences reported to entities in the DESE Portfolio.

5.4.8 The following sections provide a summary of the 2019–20 financial statements audit results for all material entities within the DESE portfolio and significant or moderate findings relating to non-material entities.

Department of Education Skills and Employment

5.4.9 The Department of Education, Skills and Employment (DESE) is responsible for ensuring Australians can experience the social wellbeing and economic benefits that quality education, training and employment provide.

5.4.10 The department was formerly known as the Department of Education and largely merges the functions of that entity with the now abolished Department of Employment, Skills, Small and Family Business (Employment).

5.4.11 The Administrative Arrangements Order (AAO) of 29 May 2019 renamed the then Department of Jobs and Small Business — to become the Department of Employment, Skills, Small and Family Business and also transferred responsibility for skills, vocational education and training from the then Department of Education. An amending AAO on 8 August 2019 also transferred legislation relating to vocational student loans to Employment. A further AAO on 5 December 2019, effective 1 February 2020, resulted in the cessation of Employment with the employment and skills functions transferred back to DESE. Other functions transferred to the Industry, Attorney-General’s, and the Prime Minister and Cabinet portfolios.

5.4.12 Consistent with the Australian Government’s response to the COVID-19 pandemic, the Department of Education, Skills and Employment has implemented a number of measures aimed at supporting members of the Australian public who are likely affected by the pandemic. These measures include:

• $1.3 billion in additional funding to support small businesses to retain apprentices and trainees. This stimulus measure operated as a 50 per cent wage subsidy paid to eligible small businesses from 1 January to 30 September 2020. The criteria included that the apprentice or trainee must have been in an Australian apprenticeship with a small business as at 1 March 2020; and
• business continuity payments being introduced from April 2020, in lieu of the Child Care Subsidy program, consisting of base payments and supplementary payments in certain circumstances. These payments complemented JobKeeper payments administered by the Australian Taxation Office as they were designed to assist child care centres continue as viable businesses during the downturn in business activities as a result of the COVID-19 pandemic.

Summary of financial performance

5.4.13 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by DESE and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.4.2: Key departmental financial statements items

Note a: The 2018–19 comparative figures displayed are for the former Department of Education and the former Department of Employment, Skills, Small and Family Business.

Source: DESE’s audited financial statements for the year ended 30 June 2020.

5.4.14 Net cost of services decreased by $15.5 million as a result of a reduction in supplier costs associated with the impact of AASB 16, and Machinery of Government changes which resulted in reduced costs of IT services and a reduction in staff levels in the new merged entity. These reductions were partially offset by an increase in depreciation on right-of use building assets due to the adoption of AASB 16.

5.4.15 Revenue from government decreased by $27.0 million due to funding transferred to other agencies following the AAOs of 29 May 2019 and 5 December 2019.

5.4.16 The increase in assets and liabilities is primarily due to increase of $375.5 million of right-of-use assets and $381.2 million of lease liabilities following the introduction of AASB 16.

Table 5.4.3: Key administered financial statements items

Note a: The 2018–19 comparative figures displayed are for the former Department of Education and the former Department of Employment, Skills, Small and Family Business.

Source: DESE’s audited financial statements for the year ended 30 June 2020.

5.4.17 Total expenses increased by $5.9 billion mainly due to an increase in grant payments of $2.8 billion, including non-government school grants brought forward from 2020–21, and an increase of $2.9 billion in fair value losses associated with higher education and vocational student loans that are not expected to be repaid.

5.4.18 The decrease in income relates to the $5.6 billion fair value gain that was recognised in 2018–19 for the Higher Education Loan Program (HELP), which was assessed as a fair value loss in 2019–20 as discussed above.

5.4.19 The increase in assets was primarily due to a $481.7 million increase in receivables, including advances and loans for higher education and vocational students, and trade support loans. The value of these receivables at year-end was determined using actuarial assessments which relied on assumptions regarding the collectability of repayments based on future employment and salary rates, and discount factors, that contain a significant degree of uncertainty and are influenced by the economic environment.

5.4.20 The $278.0 million reduction in total liabilities is primarily associated with a decrease of $180.0 million in the present value of the Commonwealth’s total superannuation liabilities in respect of current and former university employees who are members of state superannuation schemes.

Key areas of financial statements risk

5.4.21 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of DESE’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. Areas highlighted for specific audit coverage in 2019–20 are provided in Table 5.4.4, including areas which were considered Key Audit Matters (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

Table 5.4.4: Key area of financial statements risk

Source: ANAO 2019–20 audit results, and DESE’s audited financial statements for the year ended 30 June 2020.

5.4.22 The following Auditor-General Reports were tabled during 2019–20:

• No.33 2019–20 Tertiary Education Quality and Standard Agency’s Regulation of Higher Education.
• No.10 2019–20 Design and Governance of the Child Care Package.

5.4.23 While these reports did not include recommendations regarding risks to DESE’s financial administration as it relates to the financial statements, the observations of these reports were considered in designing audit procedures.

Audit results

5.4.24 The following table summarises the status of audit findings reported by the ANAO in 2018–19 and 2019–20.

Table 5.4.5: Status of audit findings

Source: ANAO 2019–20 audit results.

5.4.25 For each of the findings listed below, the ANAO undertook additional audit procedures to gain assurance that the DESE’s 2019–20 financial statements were not materially misstated.

Resolved moderate audit findings

Monitoring of Database Activity

5.4.26 IT databases supporting core departmental applications were managed and maintained at the then Department of Employment, Skills, Small and Family Business for both entities (Education and Employment), with each entity maintaining responsibility for its own data. This finding applied to the databases supporting the financially significant applications for both entities in the 2018–19 audit.

5.4.27 The ANAO recommended during the 2018–19 interim audit that a regular and formalised process be put in place that will ensure the actions of privileged users at the database level are logged and monitored for all applications. It was also recommended that standard operating procedures providing support to this process should also be developed and formally approved by senior management.

5.4.28 During the interim audit phase of the 2019–20 audit, the ANAO reviewed the progress that DESE had made to address this finding. DESE implemented a tool to analyse the logs and report exceptions for manual review and follow up. An assessment was also done across the financially significant systems to identify the key database tables and fields to be monitored. DESE piloted the new process, along with new standard operating procedures, before implementing a wider rollout. The ANAO assessed the design of these controls as effective to address the risks identified, subject to further audit testing of implementation and operating effectiveness during the final audit phase.

5.4.29 During the 2019–20 final audit phase, the ANAO confirmed that DESE is logging and monitoring database activity and standard operating procedures were also piloted before extending the processes to other key IT systems. Problems were reported with the privileged user controls over some applications that were resolved in June 2020 and DESE has advised that the controls are now in place. On that basis, the finding has been downgraded to a minor rated finding, and the ANAO will again review operating effectiveness during the 2020–21 interim audit.

Unauthorised Network Access

5.4.30 During the IT general control testing undertaken for the 2018–19 financial statements audit, the ANAO identified a network account that remained active after the employee had been terminated. This account did not have an ‘expiry date’ making this account fully accessible.

5.4.31 The account remained active as a result of the Exit Advice Notification (EAN) not being finalised when the employee terminated. Further testing identified additional cases where the EAN process was not followed, as well as other instances where network access had not been disabled on cessation of employment.

5.4.32 The ANAO undertook testing over employee terminations during the final audit phase in 2018–19. This testing identified six terminated staff that did not have their access removed. In all cases, the account had not been disabled.

5.4.33 In response to this finding, DESE has implemented a daily automated procedure to identify employees who have ceased employment and ensure that their network account is disabled. During the 2019–20 interim audit phase the ANAO undertook testing over terminations and identified a small number of exceptions where there was a delay between employment cessation and the disabling of the network account. These occurred before the automated procedure had been put in place. The ANAO therefore downgraded the finding and conducted further testing during the 2019–20 final audit. Testing during the final audit phase confirmed that the controls implemented are effective and the finding has been resolved.

Resolved L1 legislative compliance finding

S83 Breach – GST on payments to non-government schools

5.4.34 DESE makes payments to non-government schools in accordance with the Australian Education Act 2013 (AE Act). GST has historically been included in the payments since the introduction of GST in 2000. Legal advice obtained by DESE confirmed the AE Act did not provide authority for inclusion of GST in the amounts paid to non-government schools. The Department identified GST to the value of $14.6 billion included in the payments to non-government schools over a period of 20 years.

5.4.35 To address this issue, DESE acted to ensure the appropriate legislative amendments via the Australian Education Amendment (Direct Measure of Income) Act 2020. The Department also obtained the appropriate approvals to waive technical debt associated with the GST amounts.

5.4.36 The ANAO agreed with the assessment that the lack of a valid appropriation for the inclusion of GST in the payments to non-government schools was a significant legislative breach and recommended that appropriate disclosures be made in the Department’s 2019–20 financial statements, including quantification of the amount of the breaches, and changes to the relevant legislation and internal processes within the Department. This finding has now been resolved.

Australian Research Council

5.4.37 The Australian Research Council (ARC) advises the Australian Government on research matters, administers the National Competitive Grants Program, a significant component of Australia’s investment in research and development, and has responsibility for Excellence in Research for Australia (ERA).

Summary of financial performance

5.4.38 The following section provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items reported by ARC, and includes commentary regarding significant movements between years contributing to overall performance.

Table 5.4.6: Key departmental financial statements items

Source: ARC’s audited financial statements for the year ended 30 June 2020.

5.4.39 The movement in assets and liabilities is primarily due to the initial recognition of right-of-use assets of $11.2 million and lease liabilities of $11.2 million in 2019–20 due to the implementation of the revised AASB 16.

Table 5.4.7: Key administered financial statements items

Source: ARC’s audited financial statements for the year ended 30 June 2020.

5.4.40 The increase in total expenses is primarily driven by a $79.2 million increase in grant payments to State and Territory governments mainly due to a number of new grants offered under the Discovery and Linkage Programs. Fluctuations in other balances reflect normal business activities.

Key areas of financial statements risk

5.4.41 The ANAO completed appropriate audit procedures on all material items. The ANAO also assessed the IT general and application controls for key systems that support the preparation of ARC’s financial statements. The ANAO focused audit effort on those areas that are assessed as having a higher risk of material misstatement. The area highlighted for specific audit coverage in 2019–20 are provided in Table 5.4.8. No significant or moderate audit findings were identified relating to the key areas of risk.

Table 5.4.8: Key areas of financial statements risk

Source: ANAO 2019–20 audit results, and ARC’s audited financial statements for the year ended 30 June 2020.

Audit results

5.4.42 There were no significant or moderate audit findings arising from the 2018–19 or 2019–20 financial statements audits.

Comments on non-material entities

Australian National University

5.4.43 The Australian National University (ANU) was set up in 1946 with a special charter to give the nation a university that would ‘advance the cause of learning and research in general, and take its rightful place among the great universities of the world’. The ANU has a 31 December reporting date.

New moderate audit findings

Data integrity post the ANU data breach

5.4.44 In June 2019, it became public that there were cyber intrusions to the ANU’s systems and data. It was revealed that this access included a presence in the Enterprise System Domain (ESD) where data was held for the financial system and the human resources/payroll system (PeopleSoft). Two key steps that are considered better practice following a confirmed exposure to breach system data are: to force all users to reset passwords; and to undertake a form of validation to ensure that data within the system has not been altered.

5.4.45 The ANU is in the process of developing a standard operating document to address the risk of any future breaches. This document is being developed by the Chief Information Security Officer in conjunction with the Chief Information Officer and the Chief Financial Officer. The ANAO will review the implementation and effectiveness of standard operating procedures as part of the audit of the financial statements for the year ending 31 December 2020.

Completeness of bank accounts in the general ledger

5.4.46 The ANU has a large number of bank accounts valued at $120 million in the December 2019 financial statements. During the audit process of verifying bank accounts to external confirmations, the ANAO noted that a bank account which had been opened during 2019 and had a balance of 15,000 Euros was not reflected in ANU’s financial management information system.

5.4.47 Further investigations indicated that the bank account had been opened without following due processes surrounding opening of new bank accounts. The ANAO considers that these actions represent a significant control breakdown and the policies and procedures relating to this process should be reinforced with all management and staff to prevent any recurrence of this finding. The ANAO will review the effectiveness of controls surrounding opening of a new bank account as part of the audit of the financial statements for the year ending 31 December 2020.