This report complements the Interim Report on Key Financial Controls of Major Entities financial statement audit report published in May 2020. It provides a summary of the final results of the audits of the Consolidated Financial Statements for the Australian Government and the financial statements of Australian Government entities for the period ended 30 June 2020.

Executive summary

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.

1. The Consolidated Financial Statements

Chapter coverage

This chapter outlines the results of the audit of the Consolidated Financial Statements of the Australian Government, which includes the Whole of Government and the General Government Sector financial statements for the year ended 30 June 2020, and the Australian Government’s financial results for 2019–20.

The chapter includes an analysis of how financing through equity investments and concessional loans impacts the Australian Government’s financial results and provides a summary of those entities established to provide financing arrangements.

Audit results

The 2019–20 Consolidated Financial Statements were signed by the Minister for Finance on 24 November 2020 and the Auditor-General’s unmodified auditor’s report was issued on 24 November 2020.

The result shows 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 borrowings represent 16.6 per cent of the total expenses for 2019–20.

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.

Table 1.1: Key areas of financial statements risk

Relevant financial statement itema

Key area of risk

Audit risk rating

Factors contributing to the risk assessment

Audit results

Income Taxation Revenue

$447.1 billion

Australian Taxation Office

Completeness and accuracy of taxation revenue

KAM

Higher

  • completeness, relevance and accuracy of source data;
  • complex estimation processes, involving significant judgement and specialist knowledge; and
  • volatility in economic conditions increases the uncertainty of factors used in estimating taxation revenue.

No significant or moderate audit findings identified.

Subsidy expenses

$67.2 billion

and subsidy provisions

$23.7 billion

JobKeeper

$31.6 billion

and Cash Flow Boost measures

$23.6 billion

Australian Taxation Office

Eligibility assessments and completeness of reported subsidy expenses and provisions in connection with JobKeeper and Cash Flow Boost measures

KAM

Higher

  • the significant value of the subsidy expenses and provisions and the speed of implementation of the COVID-19 stimulus measures;
  • for the JobKeeper scheme, employers are required to self-assess their eligibility on-line and assert they meet the criteria specified in the legislation. For the Cash Flow Boost measure entities that meet the legislative requirements are identified by the Australian Government and payments are then made without the need for an application or specific declaration. The Australian Taxation Commissioner has considerable discretion to make judgements on eligibility; and
  • the Australian Government has recognised a liability for JobKeeper payments and cash flow boost claims attributable to the 2019–20 financial year but not paid by 30 June 2020. This liability is based on significant judgements, including estimates of eligible employers.

No significant or moderate audit findings identified.

Personal benefits expense

$144.7 billion

and personal benefits payable

$4.7 billion

Australian Taxation Office

Department of Social Services

Accuracy and occurrence of personal benefits expense and valuation of personal benefits payable

KAM

Higher

  • dependent on the correct self-disclosure of personal circumstances by a large number of diverse recipients;
  • reliant on a complex information technology system for the processing of a high volume of payments across numerous personal benefit types with varying conditions for determining the payment amount;
  • estimation models require significant judgements and assumptions including, but not limited to: new budget measures affecting benefit programs, timing of payments; personal circumstances of recipients; and the economic environment; and
  • the impacts of the Income Compliance Program in view of the Government’s decision relating to the use of averaged income data to calculate an individual’s personal benefits debt that was then included in personal benefits receivables and whether these potential debt repayments and zeroing had been appropriately accounted for.

No significant or moderate audit findings identified.

Superannuation liabilitiesb

$431.1 billion

Department of Defence

Department of Finance

Valuation of superannuation liabilities

KAM

Higher

  • completeness and accuracy of data provided to the actuary; and
  • complexity of the calculation, requiring significant judgement and estimation in the selection of long-term assumptions, including the salary growth and discount rates to which the valuation of the superannuation liability is highly sensitive.

No significant or moderate audit findings identified.

Advances paid

$64.8 billion

Other receivables and accrued revenue

$66.7 billion

Numerous entities

Valuation of advances paid and receivables

KAM

Moderate

  • complexity and uncertainty in estimating fair value, including recoverability and impairment; and
  • sensitivity of these balances to changes in assumptions.

No significant or moderate audit findings identified.

Investments, loans and placements:

Collective investments

$76.3 billion

Future Fund Management Agency

Department of Finance

Valuation of collective investment vehicles

KAM

Moderate

  • size of the investments and inherent subjectivity and significant judgements and estimates required where market data is not available to determine the fair value of these investments;
  • complexity of valuation techniques and assumptions required in determining fair value; and
  • the COVID-19 pandemic and associated economic downturn has caused significant volatility and uncertainty and this has impacted the valuation of collective investment vehicles.

No significant or moderate audit findings identified.

Non-financial assets

$241.8 billion

Numerous entities

Specialist Military Equipment (SME)

$71.7 billion

Department of Defence

Valuation of specialist military equipment and other plant, equipment and infrastructure assets

KAM

Moderate

  • differences in accounting policies applied by Government businesses compared to those applied in the preparation of the CFS;
  • complex valuation process and judgement involved in valuing assets such as the NBN network; and
  • high degree of management judgement due to the highly specialised nature of the SME, including judgements required to determine appropriate useful lives and assess the financial impact of indicators of impairment.

No significant or moderate audit findings identified.

Refer to the Department of Defence’s detailed results in Chapter 5.

         

Note a: Figures presented in Table 1.1 may differ from the financial statements of individual entities as a result of: eliminations and adjustments at the CFS level; or where the entities identified contribute a majority to the balance of the financial statement line item.

Note b: These are the main government entities responsible for administration and reporting of Australian Government superannuation liabilities. Liabilities also include schemes managed by other entities, such as the Australian Postal Corporation.

Source: ANAO 2019–20 audit results, and the CFS for the year ended 30 June 2020.

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

Figure 1.1 provides details of the 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

Figure 1.2 provides details of the proportion of Government expenses 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

Figure 1.3 shows the changes in the Australian Governments 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

Relevant financial statement item

Explanation for key movements in net worth

Investments, loans & placements

Investments, loans and placements comprise securities and other non-equity investments held for liquidity or policy purposes. The increase of $60.8 billion is largely due to an additional investment of $57.2 billion by the Reserve Bank of Australia (RBA) to purchase securities in the secondary market as part of monetary policy measures to lower interest rates across the economy in response to COVID-19.

Deposits held

Deposits held are predominantly the liability for funds held with the RBA. These funds are held on behalf of the Australian Government in order to provide exchange settlement accounts that financial institutions must have in order to settle financial obligations arising from the clearing of payments. The increase of $44.9 billion is primarily as a result of the enhanced liquidity operations of the RBA in response to COVID-19.

Government securities

The Australian Office of Financial Management (AOFM), on behalf of the Australian Government, undertakes debt management activities including the issuance of Government securities, such as, Treasury bonds, Treasury indexed bonds and Treasury notes. Government securities increased by $106.6 billion. This is primarily driven by:

  • the issuance of new Treasury Bonds of $128.2 billion offset by debts repurchased ($9.0 billion), maturity of securities during the year ($34.3 billion);
  • increases in net market value adjustments of $10.4 billion and re-measurement changes of $6.1 billion; and
  • the increase in Treasury notes of $55.7 billion to meet short-term borrowings offset by $51.9 billion applied by the RBA as part of the funds to purchase additional investment.

Other provisions

Other provisions include provisions for benefits and claims, grants, subsidies, tax refunds etc. The increase in other provisions of $26.6 billion is primarily a result of the $19.6 billion year-end provision for JobKeeper and cash flow boost payments to businesses for which recipients are entitled under legislation and outstanding benefits and claims of $6.5 billion.

Changes in other assets and liabilities

Significant movements in assets and liabilities that impacted on net worth were:

  • an increase of $13.5 billion in other receivable and accrued revenue largely driven by the increase in tax receivables relating to payment deferrals granted to taxpayers experiencing financial hardship as a result of the COVID-19 pandemic and the advances paid to the states during 2019–20;
  • an increase of approximately $24.1 billion in the value of buildings, and other plant, equipment and infrastructure assets due the recognition of right-of-use assets on initial application of AASB16 Leases. Lease liabilities also correspondingly increased by $22.3 billion as a result of the application of AASB 16;
  • an increase in specialist military equipment of $5.1 billion, primarily as a result of additions and revaluation adjustments;
  • an increase of $15.0 billion in the Australian Government’s defined benefit superannuation liabilities due to the discount rate used to calculate the liability;
  • increase of $6.3 billion in other employee liabilities; and
  • an additional $10.1 billion in Australian banknote currency on issue.
   

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

Figure 1.4 provides details of the 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

Figure 1.5 provides details of the Australian Government net financial position (as a 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

Figure 1.6 provides detail of the total value of Australian Government superannuation liabilities, 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

Entity

Contributed Equity

$000

Net assets

$000

Fair value (GGS)

$000

NBN

29,500,000

2,100,000

13,768,000

WSA Co Pty Ltd

1,099,165

203,755a

628,755a

Australian Rail Track Corporationb

3,544,093

2,826,466

2,919,700

Australian Naval Infrastructure Pty Ltd

1,188,423

1,182,173

1,182,173

Australian Postal Corporation

400,000

2,203,100

2,593,000

Moorebank Intermodal Company

452,285

295,156

323,593

       

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

 

2015–16

($b)

2016–17

($b)

2017–18

($b)

2018–19

($b)

2019–20

($b)

Debts not to be repaid (new loans)

(2.0)

(1.9)

(1.3)

(1.2)

(1.1)

           

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

Entity

Number of loans

Summary of loan transactions 2019–20

Northern Australia Infrastructure Facility

11

Eleven loan commitments of up to $1.4 billion.

National Housing Finance Investment Commission

7

NHFIC advanced $882.0 million in loans and committed a further $68.7 million as at 30 June 2020.

Regional Investment Corporation

635

$715.0 million approved during 2019–20. For the period ended 30 June 2020, $396.0 million was advanced across loans that were approved in the 2018–19 and 2019–20 financial years.

     

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

Entity

Total FTE

Total Employee Expenses ($’000)

No. of KMP

No. of Board membersa

Total KMP remuneration ($’000)

Australian Office of Financial Management

44

7,026.0

1

Does not have a board

435.0

Export Finance Australia

107.5

18,100.0

15

7

3,307.0

Northern Australia Infrastructure Facility

22.4

7,544.0

11

7

1,704.6

National Housing Finance Investment Commission

28

5,371.0

8

7

1,066.1

Regional Investment Corporation

30

4,417.8

10

5

1,045.0

           

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

Name

Definition

Net operating balance

This is calculated as income from transactions minus expenses from transactions. It is equivalent to the change in net worth arising from transactions.

Operating result

Income less expenses, excluding the components of other comprehensive income. Also known as ‘profit and loss’.

Other economic flows

Changes in the volume or value of an asset or liability that do not result from transactions (e.g. revaluations).

Comprehensive result

Total change in net worth before transactions with owners in their capacity as owners. Also known as ‘total change in net worth’.

Fiscal balance

The financing requirement of government, calculated as the net operating balance less the net acquisition of non-financial assets. A positive result reflects a net lending position and a negative result reflects a net borrowing position. Also known as net lending/ (borrowing).

Net worth

Assets less liabilities and shares/contributed capital.

Net debt

Net debt is equal to gross debt minus the stock position in financial assets corresponding to debt instruments.

Net financial worth

Net financial worth is equal to financial assets minus liabilities. It is a broader measure than net debt in that it incorporates provisions made (such as superannuation, but excluding depreciation and bad debts) as well as holdings of equity. Net financial worth includes all classes of financial assets and liabilities, only some of which are included in net debt.

Government securities

All securities issued by the Australian Government at tenders conducted by the AOFM. They comprise Treasury bonds, Treasury notes, Treasury indexed bonds and, previously, Treasury adjustable rate bonds.

Investments for policy purposes

Acquisitions of financial assets for policy purposes are distinguished from investments by the underlying government motivation for acquiring the assets. Where assets are acquired for the purpose of implementing or promoting government policy (e.g. loans to assist industry development), the acquisition of the assets is treated as being for policy purposes. Acquisition of financial assets for policy purposes includes government policies encouraging the development of certain industries or assisting citizens affected by natural disaster.

Cash surplus/ deficit

Net cash flows from operating activities plus net cash flows from acquisition and disposal of non-financial assets less distributions paid less the value of assets acquired under finance leases and similar arrangements.

Underlying cash balance

Net cash receipts from operations (excluding net Future Fund earnings), less net capital investment (including by finance lease).

   

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].

2. Financial audit results and other matters

Chapter coverage

This chapter provides:

  • a summary of the 2019–20 auditors’ reports issued by the ANAO;
  • a summary of observations regarding entities’ internal control environments;
  • an analysis of the quality and timeliness of financial statements preparation;
  • a summary of the implementation of AASB 16 Leases;
  • an analysis of the timeliness of entities’ financial reporting;
  • a summary of the reporting of Key Audit Matters;
  • an analysis of IT controls and cyber security risks;
  • an analysis of the financial sustainability of material entities; and
  • a summary of findings identified during the course of the 2019–20 financial statements audits of entities.
Conclusion

The ANAO issued 232 unmodified auditors’ reports, including the Australian Government’s Consolidated Financial Statements (CFS), and one modified auditors’ report as at 24 November 2020. For the majority of entities, at the completion of the final audits, key elements of internal control were operating effectively to provide reasonable assurance that the entities were able to prepare financial statements that were free from material misstatement. 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.

A quality financial statements preparation process will reduce the risk of untimely, inaccurate or unreliable reporting. Sixty-four per cent of entities delivered financial statements in line with an agreed timetable. The ANAO noted a decrease in findings related to processes supporting financial statements preparation; reduced delivery of draft financial statements in line with entity financial statements project plans; and an increase in the total value of audit differences reported to entities in 2019–20 compared to 2018–19. The 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 indicate some improvement has been made.

The revised leasing standard, AASB 16 Leases (AASB 16), impacted government entities in 2019–20. 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.

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 commenced. Of the remaining entities, eight per cent had not tabled an annual report as at 24 November 2020.

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 2019–20 Interim Report on Key Financial Controls of Major Entities and the 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.

An analysis of the operating results and balance sheet positions for material entities concluded that the financial sustainability for the majority of those entities was not at risk. Nevertheless, there would be benefit in the Government developing performance targets or benchmarks. This would enable an entity to assess its own financial sustainability against agreed parameters over time, and against like entities.

The ANAO reported two significant, 22 moderate and 118 minor audit findings to entities at the completion of the final audits. One significant legislative breach remains open which was first reported during 2012–13. The highest number of significant and moderate findings continue to be in the categories of:

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

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

Auditor’s report

2019–20

2018–19

Unmodified

232

240

Included an emphasis of matter

5a

1

Included a Report on other legal and regulatory requirements

0

0

Modified

1b

0

Auditors’ reports issued

233

240

Not yet issued

13c

8d

Total number of financial statements audits

246

248e

   

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

Figure 2.1 outlines the 5 elements of an entities intern control framework consisting of: Control Environment; Risk Assessment; Monitoring; Information Systems; and Control Activities, as per ASA 315.

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)

 

2019–20

2018–19

 

Debit impact

Credit impact

Net impact

Debit impact

Credit impact

Net impact

Revenue

76.7

(1,014.1)

(937.4)

60.9

(123.7)

(62.8)

Expenses

981.6

(106.2)

875.4

136.5

(94.7)

41.8

Assets

198.2

(112.2)

86.0

79.8

(126.0)

(46.2)

Liabilities

135.6

(106.6)

29.0

127.8

(76.7)

51.1

Equity

31.1

(84.1)

(53.0)

105.2

(89.1)

16.1

       

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

Figure 2.2 shows the timeframe between end of the financial year and date of auditor’s report signing over the four financial years from 2016-17 to 2019-20.

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

Figure 2.3 shows two timeframes: The calendar days between the issuance of the auditor’s report and the approval of the annual report by the accountable authority; and the calendar days between the issuance of the auditor’s report and the tabling of the annual report in Parliament.

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

Figure 2.4 compares the day annual reports were tabled in Parliament with the day of the Senate budget estimates hearing.

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

Reporting entity

Date auditor’s report issued

Approval of annual reporta

Annual report tabling date

Senate estimates dateb

Attorney-General’s portfolio

Coal Mining Industry (Long Service Leave Funding) Corporation

12 Oct 20

c

27 Oct 20

Health portfolio

Department of Healthd

9 Sept 20

c

21 Oct 20

Infrastructure, Transport, Regional Development and Communications portfolio

Department of Infrastructure, Transport, Regional Development and Communications

2 Oct 20

7 Oct 20

29 Oct 20

19 Oct 20

Australian Rail Track Corporation Limited

15 Oct 20

15 Oct 20

19 Oct 20

National Capital Authority

1 Sept 20

14 Oct 20

9 Nov 20

19 Oct 20

Prime Minister and Cabinet portfolio

Indigenous Business Australia

2 Nov 20

28 Sept 20

11 Nov 20

23 Oct 20

Indigenous Land and Sea Corporation

28 Sept 20

19 Oct 20

Treasury portfolio

Department of the Treasury

10 Sept 20

8 Nov 20

c

20 Oct 20

     

: 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

Figure 2.5 shows the changes to remote working arrangements and information technology (IT) controls within entities as part of the response to the COVID-19 pandemic.

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

Figure 2.6 provides detail of the assessments of exposure to cybersecurity intrusions during the COVID-19 pandemic.

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

    Figure 2.7 provides detail of entities 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

    Category

    Parameters

    Large deficits

    An entity’s average deficit for the past five years is greater than one per cent of total expenses.

    Small deficits or surpluses

    An entity’s average deficit or surplus for the past five years is less than one percent of total expenses.

    Large surpluses

    An entity’s average surplus for the past five years is greater than one per cent of total expenses.

      

    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

    Figure 2.8 shows the operating results of entities categorised by: large average deficit; small average deficit; and surplus or large average surplus. The graph presents the results grouped by not-for-profit entities and for-profit/quasi-commercial entiti

    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

    Category

    Parameters

    Strong

    Entities where financial assets were at least 40 per cent of total liabilities and where equity was at least 85 per cent of total assets. These entities have the strongest balance sheets.

    Less strong

    Entities where financial assets were less than 40 per cent of liabilities OR where total liabilities was more than 85 per cent of total assets. These entities had weaker balance sheets, either in liquidity or gearing terms.

    Weak

    Entities where financial assets were less than 40 per cent of liabilities AND where total liabilities were more than 85 per cent of total assets. These entities are the most likely to need additional funding in the future.

      

    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

    Figure 2.9 categorises the balance sheet position of entities into strong; less strong; and weak over the four financial years from 2016-17 to 2019-20.

    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.

    Table 2.6: ANAO analysis of entities impacted by the COVID-19 pandemic

    Entity

    Industry

    Effect on the entities 2019–20 financial statements

    The entity’s response relating to the impact of the Australian Bushfires and or the COVID-19 pandemic

    ANAO audit opinion issued

    Airservices Australia

    Aviation

    Decrease in revenue by 25% and an increased long term and short term borrowings of $1.2 billion.

    Letter of intent provided by the Minister and additional funding from Government.

    Unmodified audit opinion

    Civil Aviation Safety Authority

    Aviation

    The aviation fuel excise decreased by 17% from the prior year.

    Increase of 26% in appropriation funding in 2019–20.

     

    Letter of intent provided by the Minister and additional funding from Government.

    Unmodified audit opinion

    Royal Australian Navy Central Canteens Board (RANCCB)

    Defence Welfare and Recreational Services

    Decrease in revenue of 9%

    RANCCB restructured their operations, reducing staffing and terminating casual employees.

    Unmodified audit opinion

    Bundanon Trust

    Tourism

    Decrease in own-source revenue of 40%

    Additional funding provided by the Government and access to financially liquid investments

    Unmodified audit opinion

    Director of National Parks

    Tourism

    Park entry and camping fees reduced by 34%

    Additional appropriation funding provided by the Government and camping fees to recommence in January 2021.

    Unmodified audit opinion

    Great Barrier Reef Marine Park Authority

    Tourism

    24% reduction in revenue.

    Government funding will continue into the new financial year for operations and additional capital works on their Reef HQ Aquarium, with environmental management fees to recommence in January 2021.

    Unmodified audit opinion

    Sydney Harbour Federation Trust

    Tourism

    Decrease in own-source revenue of 13%.

    Government approved access to cash reserves.

    Unmodified audit opinion

    Voyages Indigenous Tourism Australia Pty Ltd

    Tourism

    Decrease in own-source revenue of 26%.

    Letter of support provided by Indigenous Land and Sea Corporation (parent entity).

    Unmodified audit opinion with an emphasis of matter as a result of COVID-19 and the valuation of Ayers Rock Resort.

         

    Source: ANAO’s analysis.

    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

    Rating

    Description

    Significant (A)

    Issues that pose a significant business or financial management risk to the entity. These include issues that could result in a material misstatement of the entity’s financial statements.

    Moderate (B)

    Issues that pose a moderate business or financial management risk to the entity. These may include prior year issues that have not been satisfactorily addressed.

    Minor (C)

    Issues that pose a low business or financial management risk to the entity. These may include accounting issues that, if not addressed, could pose a moderate risk in the future.

    Significant legislative breach (L1)

    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.

    Other non-compliance with Legislation (L2)

    Other instances of non-compliance with legislation the entity is required to comply with.

    Non Compliance with Subordinate Legislation (L3)

    Instances of non-compliance with subordinate legislation, such as the PGPA Rules.

      

    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

    Category

    Significant

    Moderate

    Minor

    Main areas of weakness

    IT control environment

    8

    40

    • security management, particularly, user access and monitoring of privileged users; and
    • change management process.

    Compliance and quality assurance frameworks

    6

    20

    • appropriate quality assurance frameworks supporting financial reporting; and
    • compliance frameworks addressing key business risks and program payments.

    Accounting and control of non-financial assets

    3

    13

    • management of inventory balances;
    • management and monitoring of assets including stocktakes, work in progress and capitalisation; and
    • processes supporting the valuation and assessment of impairment of assets.

    Revenue, receivables and cash management

    1

    13

    • recognition of revenue arising from multi-year contracts; and
    • monitoring, management and review of bank accounts.

    Human resources financial processes

    2

    16

    • management of leave entitlements;
    • documentation and oversight of activities supporting payroll functions.

    Purchases and payables management

    2

    4

    • authorisation and oversight of expenditure; and
    • segregation of duties.

    Other audit findings

    2

    12

    • governance and compliance relating to engagement and termination of staff, staff remuneration and Board operations
    • processing of journal transactions;
    • financial arrangements for intercompany transactions and charging costs between Departmental and Administered funding;
    • management of delegations; and
    • governance arrangements with third parties.

    Total

    2

    22

    118

     

         

    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

    Figure 2.10 presents the number of IT control environment findings the four financial years from 2016-17 to 2019-20. These are presented by category significant, moderate or minor

    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

    Figure 2.11 presents the number of compliance and quality assurance framework findings the four financial years from 2016-17 to 2019-20.These are presented by category significant, moderate or minor.

    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

    Figure 2.12 presents the number of accounting and control of non-financial assets findings over the four financial years from 2016-17 to 2019-20. These are presented by category significant, moderate or minor.

    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

    Figure 2.13 presents the number of revenue, receivables and cash management findings over the four financial years from 2016-17 to 2019-20. These are presented by category significant, moderate or minor.

    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

    Figure 2.14 presents the number of human resources financial processes findings over the four financial years from  2016-17 to 2019-20. These are presented by category significant, moderate or minor.

    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

    Figure 2.15 presents the number of purchases and payables management findings over the four financial years from  2016-17 to 2019-20. These are presented by category significant, moderate or minor.

    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

    Figure 2.16 presents the number of other audit findings over the four financial years from 2016-17 to 2019-20. These are presented by category significant, moderate or minor.

    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

    Figure 2.17 presents the number of significant legislative breaches over four financial years from 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.

    3. Reporting and auditing frameworks

    Chapter coverage

    This chapter outlines recent and future changes to the public sector reporting framework and the Australian auditing framework relating to the auditor’s report on financial statements.

    Summary of developments

    The expectation is that the COVID-19 pandemic will continue to impact on the work of the ANAO, for example, changes to work arrangements are likely to increase the use of remote access when conducting audits. It is also expected that audits will continue to face challenges such as the increased uncertainty associated with asset valuations and a limited capacity to undertake physical compliance activities such as stocktakes.

    Following on from the successful adoption of three new or revised accounting standards for revenue and leases in 2019–20, there are no significant changes in accounting standards applicable to Commonwealth entities for 2020–21.

    Australian Auditing Standard ASA 540 Auditing Accounting Estimates and Related Disclosures was revised and re-issued for 2020–21. The revised standard places increased emphasis on the need for auditors to consider management’s assessment of estimation uncertainty and use of judgement.

    The auditing of performance information is an emerging area of interest for both national and international auditing standard setters. This chapter provides an update on ANAO’s work in developing a performance audit framework.

    This chapter includes a summary of the ANAO’s quality assurance framework. The quality assurance framework is designed to provide the Auditor-General with reasonable assurance that the ANAO complies with its policies and procedures, applicable legal and regulatory requirements, and that reports issued by the ANAO are appropriate in the circumstances. The quality assurance framework emphasises that quality audits are reliant on the strength of the ANAO’s independence and quality control processes.

    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

        Figure 3.1 presents the 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.

        4. Management of staff leave

        Chapter coverage

        This chapter examines whether three selected portfolio departments have established appropriate arrangements for managing staff leave, including compliance with legislation and entity policies and procedures.

        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 chapter details:

        • practices adopted by the three entities to identify and incorporate within employee frameworks, the leave requirements and conditions established within legislation, awards, and workplace agreements and determinations;
        • results of ANAO analysis regarding the completeness and accuracy of leave transactions reported by the entities during the period 1 July 2018 to 31 December 2019; and
        • monitoring and reporting controls that have been established by the three entities regarding compliance with related conditions, and assessment of the effectiveness of these controls.
        Conclusion

        The ANAO has concluded the three entities have adopted satisfactory practices to identify various requirements and conditions. 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.

        The analysis performed identified weaknesses in processes relating to staff leave and associated monitoring controls. Existing reporting by the three entities has not facilitated the identification of: rates of non-compliance with entity policies; weaknesses in monitoring controls and reporting; and patterns of attendance and leave that, if identified and addressed, may result in higher levels of attendance. This has resulted in inferior outcomes for the three entities from that intended by the related policies.

        In particular, the analysis:

        • identified that improvements can be made in the timeliness of submission and approval of leave requests and application of requirements including minimum and maximum entitlements;
        • identified reliance on manual controls, including management by supervisors, was not sufficiently effective in the absence of appropriate monitoring and reporting; and
        • demonstrated that employee behaviour is influenced by the policies adopted by entities.

        Entities should further define mandatory requirements to align these with organisational and human resource objectives or alternatively, enhance the monitoring of manager discretion to achieve desired outcomes for organisations and staff.

        Entities need to implement strategies to increase compliance by employees, strengthen related monitoring and reporting controls, and target identified non-compliance. This could include the adoption of data analysis tools.

        The ANAO’s observations impact entities’ operations and financial reporting. In particular, leave being taken prior to approval being given impacts the ability for entities to effectively manage resources and deliverables, while also potentially overstating the related employee liability in the financial statements.

        A moderate audit issue has been identified for the Department of Home Affairs relating to the management of staff leave. This audit issue is discussed further in paragraphs 5.8.20–5.8.24 of chapter 5. Minor audit issues were identified for the Department of the Prime Minister and Cabinet and the Treasury relating to non-compliance with leave policy and delays in leave requests and approvals respectively.

        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

        Reference

        Description

        Fair Work Laws

        Establish minimum entitlements for all employees and includes the National Employment Standards.a Key legislation that establish employee conditions for Australian Public Service employees include:

        • Fair Work Act 2009;
        • Maternity Leave (Commonwealth Employees) Act 1973;
        • Paid Parental Leave Act 2010;
        • Long Service Leave (Commonwealth Employees) Act 1976;
        • Remuneration Tribunal Act 1973;
        • Safety, Rehabilitation and Compensation Act 1988;
        • Public Service Act 1999; and
        • Parliamentary Service Act 1999.

        Awards

        Establish minimum pay and conditions for an industry or occupation.a

        Enterprise Agreements

        Establish minimum pay and conditions for a particular workplace and are negotiated and approved through formal process.a

        Employment Contracts

        Provide additional conditions for an individual but cannot reduce or remove minimum entitlements.a

        Practices adopted by entities to identify various requirements and conditions

         

        The Department of Home Affairs’ Policy and Procedural Control Register details underpinning legislation and requirements, including those relating to staff leave.

        The Department of the Prime Minister and Cabinet has established a Leave Policy to complement the enterprise agreement. This policy details the purpose, authority and eligibility for leave including all legislative requirements.

        While the Treasury has not compiled a central registry of requirements and conditions, its’ Legislative Compliance Policy and Framework establishes arrangements to monitor and record compliance with legislative obligations. This includes the identification of key legislation that relates to leave. Separate leave guidelines provide further detail of specific leave requirements and conditions.

        Employment frameworks established to address requirements and conditions

        The Department of Home Affairs’ Policy and Procedural Control Register provides all leave related policy and procedural instructions, and forms part of its Policy and Procedural Controls Framework. This is complemented by: a Payroll Controls Framework; a human resource intranet site ‘MyHR’ for staff and includes the February 2019 Workplace Determination, procedural instructions, policies and fact sheets.

        The Department of the Prime Minister and Cabinet’s Leave Policy outlines the administrative management of leave and is supported by a range of Frequently Asked Questions intranet pages for various leave types and a Standard Operating Procedures – Leave document for long service and maternity leave.

        The Treasury’s Legislative Compliance Policy and Framework also identifies: first line control and compliance owners; related policy, procedures and delegations; education and awareness initiatives; assurance activities to evidence compliance; and responses to non-compliance. The Treasury has also established guidelines for: remuneration, leave, human resource delegations and particular leave types.

           

        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

        Leave provisions (which will vary across particular entities)

        Maximum Entitlement of Annual Leave

        Employees who have an annual leave credit in excess of 2 years accrual may be directed by their Manager to take leave to reduce their balance.

        Purchase of Annual Leave

        Approval may be obtained for an employee to purchase up to 8 weeks of additional leave per year.

        Long Service Leave

        Long service leave may be granted at either full or half pay, subject to operational requirements and the approval of the Secretary. Unless otherwise provided in legislation, periods of long service leave cannot be broken with weekends, public holidays or other periods of leave.

        The minimum period for which an Employee may be granted long service leave is 7 consecutive calendar days at full pay or 14 consecutive calendar days at half pay.

        Flexible Leave and Minimum and Maximum Balances

        Flexible leave is available to all APS Level employees.

        The maximum flexible leave credit carried over is the equivalent of the standard weekly working hours for the Employee, or the average weekly hours for part-time employees.

        The maximum flex debit is 10 hours.

        Personal Leave

        Full-time employees will accrue 18 days paid personal leave entitlement each year. Part-time employees, other than casual employees, will accrue personal leave on a pro-rata basis. Personal leave credits are cumulative.

           

        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

        Entity

        30 June 2018

        30 June 2019

        30 June 2020

        Department of Home Affairs

        Full-time equivalent (FTE) staffing level

        14,181

        13,781

        13,806

        Annual leave provision

        (average per staff member based on FTE staffing level)

        $146.2m

        ($10,311)

        $140.4m

        ($10,186)

        $157.3m

        ($11,392)

        Long service leave provision

        (average per staff member based on FTE staffing level)

        $294.2m

        ($20,745)

        $329.3m

        ($23,897)

        $353.6m

        ($25,613)

        Department of the Prime Minister and Cabinet

        FTE staffing level

        1,906

        1,897

        962a

        Annual leave provision

        (average per staff member based on FTE staffing level)

        $26.5m

        ($13,875)

        $26.0mb

        ($13,681)

        $15.1m

        ($15,653)

        Long service leave provision

        (average per staff member based on FTE staffing level)

        $52.2m

        ($27,379)

        $60.2m

        ($31,758)

        $25.8m

        ($26,772)

        The Treasury

        FTE staffing level

        845

        958

        1,019

        Annual leave provision

        (average per staff member based on FTE staffing level)

        $17.7 m

        ($20,962)

        $18.0m

        ($18,761)

        $22.3m

        ($21,874)

        Long service leave provision

        (average per staff member based on FTE staffing level)

        $28.4m

        ($33,563)

        $35.5m

        ($37,060)

        $40.9m

        ($40,121)

               

        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

        Entity

        Department of Home Affairs

        Department of the Prime Minister and Cabinet

        The Treasury

        Number of staff with excess annual leave balances at only one of the three dates

        1,203

        338

        117

        Percentage of staff with excess annual leave balances at only one of the three dates

        7.9%

        14.4%

        9.3%

        Number of staff with excess annual leave balances at two consecutive dates

        638

        142

        70

        Percentage of staff with excess annual leave balances at two consecutive dates

        4.2%

        5.3%

        5.6%

               

        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

        Entity

        Department of Home Affairs

        Department of the Prime Minister and Cabinet

        The Treasury

        Purchased leave can only be approved if applicant has no excess leave balance

        Yes

        No

        No

        Maximum annual purchase in 12 month period

        40 days

        40 days

        20 days

        Minimum use on each instance

        No

        5 days –

        Delegates can approve a reduction

        Whole days

        Period that purchased leave must be used within

        12 months

        12 months

        12 months

               

        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

        Figure 4.1 presents the distribution of days of personal leave taken by the Department of Home Affairs for the period 1 July 2018 to 31 December 2019.

        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

        Figure 4.2 presents the distribution of days of personal leave taken by the Department of the Prime Minister and Cabinet for the period 1 July 2018 to 31 December 2019.

        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

        Figure 4.3 presents the distribution of days of personal leave taken by the Department of the Treasury for the period 1 July 2018 to 31 December 2019.

        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

        Figure 4.4 presents the 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

        Entity

        Department of Home Affairs

        Department of the Prime Minister and Cabinet

        The Treasury

        1 July 2018 to 30 June 2019

        Average personal leave taken for officers without an excessive annual leave balance at 30 June 2019

        11.7 days

        8.9 days

        4.4 days

        Average personal leave taken for officers with an excessive annual leave balance at 30 June 2019

        9.2 days

        6.1 days

        3.9 days

        Total average

        11.6 days

        8.6 days

        4.4 days

        1 July 2019 to 31 December 2019

        Average personal leave taken for officers without an excessive annual leave balance at 31 December 2019

        6.4 days

        4.2 days

        2.5 days

        Average personal leave taken for officers with an excessive annual leave balance at 31 December 2019

        4.0 days

        4.1 days

        2.0 days

        Total average

        6.2 days

        4.2 days

        2.5 days

               

        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

        Entity

        Department of Home Affairs

        Department of the Prime Minister and Cabinet

        The Treasury

        Maximum credit for full-time staff

        37.5 hours

        Not applicable

        38 hours

        Maximum debit for full-time staff

        (10 hours)

        (7.6 hours)

        (10 hours)

        Number of employees non-compliant with required maximum credit and/or debit balances

        1,952

        53

        61

        Percentage of employees non-compliant with required maximum credit and/or debit balances

        21.8%

        4.9%

        16.0%

               

        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

         

        Monitoring Controls and Reporting

        Department of Home Affairs

        The department has established the following:

        • an Executive Dashboard report as the primary mechanism for informing compliance with leave policy and procedures. This report facilitates the running of human resource related reports by governance bodies and Executive Level 2 officers and above, and includes functionality that enables data filtering for line areas and officers. Results and trends of key metrics within the report include: annual and long service leave; personal and miscellaneous (unscheduled) absences; and staff counts of those on leave, returning from leave and with excessive annual leave balances. The underlying data is automatically updated on a daily and monthly basis.
        • It is noted that monitoring of the use of the Executive Dashboard report is limited to the number of officers at each level that have used this tool since its implementation. This was reported to the People and Integrity Steering Committee in February and August 2019. The absence of monitoring and formal reporting of the frequency of individual usage inhibits the ability to assess stakeholder satisfaction with the information provided;
        • key employee leave metrics, including significant leave balances and personal and miscellaneous absences, are presented to the Enterprise Business Committee (formerly Enterprise Operations Committee); and
        • specific issues regarding staff leave (including significant leave balances and unscheduled absences) are reported to the People and Integrity Steering Committee as considered appropriate by the First Assistant Secretary of the People Division. There were three instances reported in the period 1 July 2018 to 31 December 2019.

        Department of the Prime Minister and Cabinet

        The department has established the following:

        • a toolkit entitled Attendance Management - Manager’s Guide to assist managers in the management of attendance and unscheduled leave;
        • an Operational HR Dashboard for SES managers to view a range of staff statistics for their areas, including significant annual leave and flex balances, unscheduled absences and leave requests pending approval; and
        • provision of information to the Executive Board on compliance with leave policies during periods when monitoring is seen as more critical and when ‘hot topics’ are identified by the Chief Operating Officer. There is no regular reporting of key leave management metrics to the Executive Board.

        The Treasury

        The Treasury has established the following which the Treasury has advised applies a risk based approach:

        • while not all controls are fully contained within the HRMIS, guidelines are used by managers to fulfil their responsibilities;
        • approval of particular leave by the human resources section (for example personal leave) and second review of compliance with guidelines by this section for particular types of leave; and
        • the establishment of a People Dashboard, that assists in the identification of human resource management issues and is provided to the Deputy Secretary of Corporate and Foreign Investment Group by the People and Organisational Strategy Branch. The Dashboard is distributed to the Executive Board on a monthly basis and extended this to Division Heads and Chief Advisers from March 2020. Further circulation of the Dashboard, including parts thereof, to others is determined by the Deputy Secretary.
           

        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.

        5. Results of financial statements audits by portfolio

        Chapter coverage

        This chapter outlines the results of the audits of the 2019–20 financial statements of individual entities by portfolio based on arrangements existing at 30 June 2020.

        The chapter also details an overview of the portfolio and each material(a) entity’s primary role in the portfolio as well as:

        • a summary of financial performance that provides a comparison of the 2018–19 and 2019–20 key departmental and administered financial statements items and commentary regarding significant movements;
        • the number of audit differences reported to all entities within the portfolio;
        • a summary of the key areas of financial statements risk and the factors contributing to those risks for all material entities (this includes identification of Key Audit Matters for relevant entities); and
        • the status of significant and moderate audit findings reported during 2019–20 and previous years for all entities.
        Audit results

        Two significant and 22 moderate audit findings were reported in 2019–20 (2018–19: three significant and 21 moderate), and one significant legislative breaches (2018–19: three).

        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

        Figure 5.0.1 shows each 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

        Portfolio

        Entity

        30 June 2020

        30 June 2019

         

         

        New findingsa

        Repeat/ unresolved findingsb

        New findingsa

        Repeat/ unresolved findingsb

        Agriculture, Water and the Environment

        Department of Agriculture, Water and the Environment

        1

        Bureau of Meteorology

        1

        Director of National Parks

        1

        Great Barrier Reef Marine Park Authority

        1

        Attorney-General’s

        High Court of Australia

        2

        Defence

        Department of Defence

        1

        2

        1

        1

        Australian Signals Directorate

        1

        Defence Housing Australia

        1

        Education, Skills and Employment

        Department of Education, Skills and Employment

        3c

        Australian National University

        2

        Finance

        Department of Finance

        1

        Foreign Affairs and Trade

        Australian Trade and Investment Commission

        1

        Health

        Department of Health

        2

        1

        Australian Digital Health Agency

        1

        National Health and Medical Research Council

        1

        Home Affairs

        Department of Home Affairs

        1

        1

        1

        Australian Federal Police

        2

        Industry, Science, Energy and Resources

        Australian Nuclear Science and Technology Organisation

        1

        1

        Clean Energy Regulator

        1

        Infrastructure, Transport, Regional Development and Communications

        Infrastructure, Transport, Regional Development and Communications

        1d

        1d

        Australian Broadcasting Corporation

        1

        Moorebank Intermodal Company Limited

        1

        1

        Prime Minister and Cabinet

        Aboriginal Hostels Limited

        1

        Kakadu Tourism (GLC) Pty Ltd

        1

        Northern Land Council

        1

        2

        Social Services

        National Disability Insurance Agency

        1

        1

        Services Australia

        2

        Treasury

        Australian Securities and Investments Commission

        1

        Total

         

        18

        6

        14

        10

              

        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

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Agriculture, Water and the Environment

        Yes

        Moderate

        16 Sept 20

        16 Sept 20

        Bureau of Meteorology

        Yes

        Low

        28 Aug 20

        31 Aug 20

        Director of National Parks

        No

        Moderate

        1 Oct 20

        1 Oct 20

        Great Barrier Reef Marine Park Authority

        No

        Low

        4 Sept 20

        4 Sept 20

        Rural Industries Research and Development Corporation

        No

        Low

        E

        28 Sept 20

        29 Sept 20

        Nil

               

        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

        Figure 5.1.1 shows the Agriculture, Water and the Environment portfolio income, expenses, assets and liabilities in 2019-20.

        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

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Agriculture, Water and the Environment

        4

        2

        6

        1

        1

        Australian Fisheries Management Authority

        3

        1

        4

        Australian Pesticides and Veterinary Medicines Authority

        5

        5

        6

        6

        Bureau of Meteorology

        3

        3

        Director of National Parks

        1

        1

        Fisheries Research and Development Corporation

        1

        1

        Grains Research and Development Corporation

        4

        4

        5

        5

        Great Barrier Reef Marine Park Authority

        3

        3

        1

        1

        Murray-Darling Basin Authority

        1

        1

        Regional Investment Corporation

        3

        3

        2

        10

        12

        Rural Industries Research and Development Corporation

        1

        1

        Sydney Harbour Federation Trust

        2

        2

        3

        1

        4

        Wine Australia

        1

        1

               

        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

        Key financial statements items

        2019–20
        DAWE ($m)

        2018–19a
        DoEE ($m)

        2018–19a
        DoA ($m)

        Net (cost of)/contribution by services

        (950.2)

        (542.9)

        (407.2)

        Revenue from government

        818.5

        403.9

        391.8

        Surplus/deficit attributable to the Australian Government

        (131.7)

        (138.9)

        (15.4)

        Total other comprehensive income/(loss)

        (17.9)

        (54.3)

        Total comprehensive loss attributable to the Australian Government

        (149.7)

        (193.3)

        (15.4)

        Total assets

        1,846.1

        966.9

        355.7

        Total liabilities

        1,493.2

        799.8

        239.9

        Total equity

        352.9

        167.1

        115.8

            

        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

        Key financial statements items

        2019–20
        DAWE ($m)

        2018–19a
        DoEE ($m)

        2018–19a
        DoA ($m)

        Total expenses

        2,035.1

        607.0

        1,755.3

        Total income

        758.7

        638.8

        856.9

        Net (cost of)/contribution by services

        1,276.4

        (31.8)

        898.4

        Total other comprehensive income/(loss)

        52.5

        3,775.2

        110.6

        Total comprehensive income/(loss)

        (1,223.9)

        3,807.0

        (787.9)

        Total assets administered on behalf of Government

        8,677.8

        26,110.0

        2,956.9

        Total liabilities administered on behalf of Government

        275.4

        55.1

        178.0

        Net assets

        8,402.4

        26,054.9

        2,778.8

            

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        revenue from contracts with customers

        $405.3 million

        Accuracy and completeness of own-source revenue

        KAM

         

        Higher

        • large range of revenue streams, collected across the country through multiple systems; and
        • complex cost recovery arrangements.

        Administered

        levies fees and charges

        $474.3 million

        Accuracy and completeness of primary industry levies, fees and charges revenue

        KAM

        Higher

        • self-assessment nature of collections; and
        • complexities involved in estimating the level of agricultural production on which revenue is based.

        Departmental

        other provisions

        $754.5 million

        Valuation of provision for restoration obligations in the Antarctic

        KAM

        Higher

        • the balance is subject to judgement and estimation, particularly relating to discount rates, escalation factors, asset replacement costs and useful lives.

        Administered

        water entitlements

        $4.0 billion

        Valuation of water entitlement assets

        KAM

        Higher

        • the balance and impairment process is subject to estimation and judgement, and impacted by factors including the maturity and assessment of the water market; and
        • information to support the valuation is provided by third parties.

        Administered

        loans (component of trade, taxation and other receivables)

        $1.0 billion

        Valuation of loans to the State and Territory Governments and farm businesses

        KAM

        Moderate

        • variation in loan terms across jurisdictions;
        • potential changes in the accounting treatment for loans should they be deemed concessional in nature;
        • the level of estimation involved in determining any potential impairment of loans; and
        • subsequent management of loans to farm businesses is undertaken by a third party (the State or Territory Government, or the Regional Investment Corporation), under a service level agreement with DAWE. The third party is responsible for entering into loan agreements with eligible farm businesses, the approval of recipients, and the ongoing monitoring and maintenance of the loans.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1a

        (1)

        Total

        1

        (1)

             

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Revenue from government

        263.3

        231.7

        Net (cost of)/contribution by services

        (348.2)

        (313.7)

        Surplus/(deficit) attributable to the Australian Government

        (84.9)

        (82.1)

        Total other comprehensive income/(loss)

        58.9

        Total comprehensive income/(loss) attributable to the Australian Government

        (26.0)

        (82.1)

        Total assets

        1 033.6

        773.5

        Total liabilities

        307.0

        184.7

        Total equity

        726.6

        588.8

           

        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

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        (0.8)

        Total revenue

        0.3

        Surplus/(deficit) attributable to the Australian Government

        (0.5)

        Total other comprehensive income

        Total comprehensive income/(loss) attributable to the Australian Government

        (0.5)

        Total assets

        0.1

        Total liabilities

        0.4

        0.5

        Net assets/(liabilities)

        (0.4)

        (0.4)

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Plant and equipment

        $461.3 million

        Valuation of specialised weather equipment

        Moderate

        • involves complex valuation processes that involve significant judgement and estimation by valuation experts; and
        • includes diverse types of assets such as radar, weather stations and super computers located across Australia.

        Computer software

        $178.7 million

        Valuation of computer software

        Moderate

        • high level of complexity involved in capturing costs and ensuring these are capitalised in accordance with Australian accounting standards; and
        • significant reliance on management’s judgements in relation to useful lives and impairment of these assets.

        Revenue from contracts with customers

        $74.1 million

        Contract liabilities

        $45.3 million

        Right-of-use assets

        $118.6 million

        Lease liabilities

        $123.8 million

        First time application of new accounting standards

        Moderate

        • various revenue streams are generated through multiple channels, requiring assessment against recognition and measurement criteria of relevant Australian Accounting Standards which can require judgement; and
        • considerable number of leases with varying terms and conditions, and a high level of manual input required.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        (1)a

        Total

        1

        (1)

             

        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

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Attorney-General’s Department

        Yes

        Moderate

        6 Oct 20

        6 Oct 20

        Nil

        Coal Mining Industry (Long Service Leave Funding) Corporation

        Yes

        Moderate

        12 Oct 20

        12 Oct 20

        Nil

        Comcare

        Yes

        Moderate

        21 Sept 20

        22 Sept 20

        Nil

        High Court of Australia

        Yes

        Low

        8 Sept 20

        8 Sept 20

        National Archives of Australia

        Yes

        Low

        31 Aug 20

        1 Sept 20

        Nil

               

        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

        Figure 5.2.1 shows Attorney-General’s portfolio income, expenses, assets and liabilities in 2019-20.

        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

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Attorney-General’s Department

        -

        -

        -

        2

        2

        Administrative Appeals Tribunal

        3

        3

        4

        4

        Australian Building and Construction Commission

        1

        1

        Australian Financial Security Authority

        1

        1

        Australian Human Rights Commission

        1

        1

        Australian Law Reform Commission

        2

        1

        3

        1

        3

        4

        Coal Mining Industry (Long Service Leave Funding) Corporation

        2

        2

        Comcare

        1

        1

        Federal Court of Australia

        1

        1

        1

        1

        2

        Fairwork Ombudsman

        1

        1

        2

        National Archives of Australia

        1

        1

        Office of Parliamentary Counsel

        1

        1

        Office of the Australian Information Commissioner

        2

        2

        Office of the Commonwealth Ombudsman

        1

        1

        2

        1

        3

        Office of the Inspector-General of Intelligence and Security

        2

        2

        3

        3

               

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (221.0)

        (124.5)

        Revenue from government

        213.0

        131.1

        Income tax expense/(benefit)

        0.2

        (1.0)

        Surplus/(deficit) attributable to the Australian Government

        (7.6)

        5.6

        Total other comprehensive income/(loss)

        Total comprehensive income attributable to the Australian Government

        7.6

        5.6

        Total assets

        593.8

        224.1

        Total liabilities

        459.4

        123.7

        Total equity

        134.4

        100.4

           

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        (897.9)

        (413.2)

        Total income

        293.1

        20.2

        Surplus/(deficit)

        (604.8)

        (393.0)

        Total other comprehensive income/(loss)

        (79.4)

        (0.1)

        Total comprehensive income/(loss) attributable to the Australian Government

        (684.3)

        (393.1)

        Total assets administered on behalf of Government

        626.0

        788.4

        Total liabilities administered on behalf of Government

        2,136.3

        2,222.7

        Net assets/(liabilities)

        (1,510.3)

        (1,434.3)

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        All financial statement line items

        Completeness and accuracy of disclosures relating to the Machinery of Government changes that transferred functions to the department

        Moderate

        • risk associated with the accurate calculation and valuation of balances transferred to the department; and
        • required financial statement disclosures.

        Administered

        Fair Entitlements Guarantee (FEG) Scheme

        Personal benefits

        $ 175.7 million

        FEG liabilities are a component of personal benefits liabilities $0.2 million

        Accuracy and occurrence of administered personal benefits expenses

        Moderate

         

        • risks relating to claims eligibility, calculation of benefit amounts and subsequent payments; and
        • the value of debts and liabilities that are recognised relating to the FEG Scheme.

        Departmental

        rendering of services

        $147.6 million

        goods and services receivables (component of trade and other receivables $38.3 million)

        Accuracy of revenue, and the accuracy and completeness of trade receivables, from rendering of services

        Moderate

        • Australian Government Solicitor (AGS) revenue from rendering of services is a significant component of the AGD’s revenue; and
        • the value and timing of revenue recognition is determined with reference to time recorded on various AGS matters, the completion and recovery of matters and the valuation of work-in-progress at year end is subject to management judgement.
            

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (324.5)

        (237.0)

        Revenue from government

        147.3

        134.5

        Surplus/(deficit) attributable to the Australian Government

        (177.1)

        (102.5)

        Total other comprehensive income/(loss)

        Total comprehensive income/(loss) attributable to the Australian Government

        (177.1)

        (102.5)

        Total assets

        1,862.7

        1,836.9

        Total liabilities

        1,720.2

        1,528.9

        Total equity

        142.6

        308.0

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Unit trusts

        $1.8 billion

        Valuation of investments

        Higher

        • Coal LSL is continuing to increase its holdings of unlisted assets; and
        • complexity surrounding the valuation of unlisted unit trusts warrant a higher degree of focus than listed equities and fixed interest investments.

        Provisions

        $1.7 billion

        Valuation of provision for reimbursements

        Higher

        • Coal LSL makes a provision for the expected reimbursement of employer’s long service leave obligations, based on a complex methodology and estimation process.
            

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net contribution by services

        22.7

        56.3

        Revenue from government

        61.2

        60.3

        Available funding from movement in claims provision

        (92.9)

        (117.0)

        Deficit attributable to the Australian Government

        (9.0)

        (0.4)

        Total other comprehensive income

        (0.1)

        0.4

        Total comprehensive income/(loss) attributable to the Australian Government

        (9.2)

        Total assets

        3,260.3

        3,366.3

        Total liabilities

        3,243.1

        3,343.3

        Total equity

        17.2

        23.0

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Workers’ compensation claims provision

        $2,029.2 million

        common law asbestos related disease claims provision

        $829.6 million

        workers’ compensation claims expense

        $193.3 million

        common law asbestos related disease claims expense.

        $23.6 million

        Valuation of workers’ compensation and asbestos related disease claims provisions

        Higher

        • complex nature of the valuation of the provisions, including: the use of actuarial valuation models; the reliance on the accuracy of underlying assumptions including claims frequency and size, discount factors and establishment of procedure through case law, judgements and data; and the inherent difficulties in reflecting macro-economic trends in the valuation model.

        Workers’ compensation premiums

        $163.3 million

        regulatory contribution

        $19.2 million

        Accuracy of revenue collection and recognition

        Moderate

        • complex nature of the legislative requirements due to the variety of criteria underpinning premium calculations.
            

        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

        Key departmental financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (23.9)

        (22.1)

        Revenue from government

        15.6

        15.5

        Surplus/(deficit) attributable to the Australian Government

        (8.3)

        (6.6)

        Total other comprehensive income

        3.8

        7.6

        Total comprehensive income/(loss) attributable to the Australian Government

        (4.5)

        1.0

        Total assets

        245.0

        244.1

        Total liabilities

        4.1

        3.9

        Total equity

        241.0

        240.2

           

        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

        Key administered financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        Total income

        1.7

        2.2

        Surplus/(deficit) after income tax

        1.7

        2.2

        Total other comprehensive income after income tax

        Total comprehensive income/(loss)

        1.7

        2.2

        Total assets administered on behalf of Government

        Total liabilities administered on behalf of Government

        0.2

        Net assets/(liabilities)

        0.2

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        Land and buildings

        $213.5 million

         

        Valuation of land & buildings

        Moderate

        • the valuation of land involves the exercise of judgement due to the restricted nature and unique characteristic of the land; and
        • the valuation of buildings is subject to judgement due to the limited availability of observable inputs for the valuation due to the building’s special purpose and heritage listing and the volume of individually significant components of the building which have different replacement costs and remaining useful lives.

        Administered

        Fees and charges

        $1.7 million

        Completeness of fees and charges income

        Moderate

        • transition year for the lodgement of e-forms and documents and the payment of fees online. This increases the risk that information contained in the financial management information system is not complete.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        2

        2

        Total

        2

        2

             

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (84.6)

        (76.6)

        Revenue from government

        67.6

        62.5

        Surplus/(deficit) attributable to the Australian Government

        (17.0)

        (14.0)

        Total other comprehensive income/(loss)

        16.5

        Total comprehensive income/(loss) attributable to the Australian Government

        (17.0)

        2.5

        Total assets

        2,033.9

        1,545.1

        Total liabilities

        512.7

        28.8

        Total equity

        1,521.2

        1,516.3

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Property, plant and equipment

        $1.48 billion

        Valuation of the archival collection

        High

        • The complex and unique nature of the archival collection.

        Accounting for leases

        $0.50 billion

        Implementation of AASB 16

        High

        • Represented a significant change in accounting for operating leases.
        • Number of significant property leases across Australia.
            

        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

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Defence

        Yes

        High

        1 Oct 20

        1 Oct 20

        Australian Signals Directorate

        Yes

        Moderate

        6 Oct 20

        6 Oct 20

        Australian War Memorial

        Yes

        Low

        14 Aug 20

        17 Aug 20

        Nil

        Defence Housing Australia

        Yes

        Moderate

        27 Aug 20

        28 Aug 20

        Department of Veterans’ Affairs

        Yes

        Moderate

        3 Sept 20

        4 Sept 20

        Nil

               

        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

        Figure 5.3.1 shows the Defence portfolio income, expenses, assets and liabilities in 2019-20.

        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

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Defence

        16

        6

        22

        12

        10

        22

        Army and Air Force Canteen Service

        1

        1

        Australian Military Forces Relief Trust Fund

        2

        2

        Australian Signals Directorate

        2

        2

        1

        1

        Australian Strategic Policy Institute Limited

        3

        3

        1

        4

        5

        Australian War Memorial

        Defence Housing Australia

        1

        1

        2

        2

        – Defence Service Homes Insurance Scheme

        2

        2

        Royal Australian Air Force Veterans’ Residences Trust Fund

        3

        3

        Royal Australian Air Force Welfare Trust Fund

        1

        1

        Royal Australian Navy Central Canteens Board

        2

        2

        Royal Australian Navy Relief Trust Fund

        2

        2

               

        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

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)a

        Net (cost of)/contribution by services

        (34,040.2)

        (32,410.7)

        Revenue from government

        34,290.2

        32,525.8

        Surplus/(deficit) attributable to the Australian Government

        250.0

        115.2

        Total other comprehensive income

        105.8

        1,150.2

        Total comprehensive income/(loss) attributable to the Australian Government

        355.8

        1,265.4

        Total assets

        112,274.9

        105,867.6

        Total liabilities

        11,468.6

        9,431.3

        Total equity

        100,806.3

        96,436.3

           

        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

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)a

        Total expenses

        9,928.6

        8,528.9

        Total income

        1,470.2

        1,511.3

        Surplus/(deficit)

        (8,458.5)

        (7,017.6)

        Total other comprehensive income/(loss)

        625.0

        (45,932.1)

        Total comprehensive income/(loss)

        (7,833.5)

        (52,949.7)

        Total assets administered on behalf of Government

        3,678.7

        3,801.1

        Total liabilities administered on behalf of Government

        188,305.8

        182,139.8

        Net assets/(liabilities)

        (184,627.1)

        (178,338.7)

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        specialist military equipment (SME)

        $71.8 billion

        Accuracy and valuation of the SME balance which includes platform assets in use and under construction and spare parts for these assets

        KAM (valuation)

        Higher

        • high degree of judgement due to the highly specialised nature of these assets and the management estimates required to determine appropriate useful lives and assess the financial impact of indicators of impairment;
        • subjectivity in the valuation assessment due to the difficulty in obtaining the replacement costs of assets with a similar capability in the absence of an active market;
        • the annual impairment and revision of useful lives are subject to a high degree of judgement and subjectivity;
        • management of assets under construction (AUC) is dispersed across numerous projects that have complex multi-year contractual arrangements and project management requirements; and
        • large prepayments are often made in relation to the acquisition and sustainment of SME.

        Administered

        employee provisions

        $188.2 billion

        Accuracy, valuation and disclosure of administered employee provisions

        KAM (valuation)

        Higher

        • complexity of the calculation and significant judgements applied in the selection of long-term assumptions including rates for salary growth, pension indexation, pension take-up and invalidity retirements; and
        • detailed disclosure requirements for the presentation and disclosure of defined benefit plans.

        Departmental

        inventory

        $7.4 billion

        including explosive ordnance (EO), fuel and general stores inventory (GSI)

        Existence and completeness of inventory balances

        KAM (existence and completeness)

        Moderate

        • the variety and number of inventory items which are managed across a large number of geographically dispersed locations and through a number of IT systems; and
        • complexity and management expertise required to assess and identify obsolete stock.

        Departmental

        general assets

        $29.6 billion

        Accuracy and valuation of general assets

        KAM (valuation)

        Moderate

        • high degree of management judgement required in respect of classifying project costs as capital or expense; and
        • assumptions applied to determine appropriate useful lives and in the selection of valuation techniques to measure fair value and assess the financial impact of indicators of impairment.

        Departmental

        lease assets and lease liabilities.

        $2.9 billion

        Recognition and measurement of right-of-use assets and lease liabilities, in relation to requirements of AASB 16

        Moderate

        • the completeness of management’s identification and assessment of leases for transition to AASB 16. These are complex and include leasing arrangements for properties and equipment which includes military equipment such as Satellites and Naval Vessels; and
        • the accuracy of the measurement of right-of-use assets and lease liabilities due to the complexity of these agreements.

        Departmental and Administered

        all financial statements items

        Accuracy and completeness of information processed by complex IT systems which are critical to key elements of financial statements

        Moderate

        • a number of complex IT systems which hold and generate information critical to financial statements;
        • IT systems which are bespoke or heavily customised for Defence; and
        • ongoing major IT reform projects which include Enterprise Resource Planning increasing Defence’s IT risk profile.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Significant (A)

        1

        (1)a

        Moderate (B)

        1

        2a

        3

        Total

        2

        2

        (1)

        3

             

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (863.1)

        (774.8)

        Revenue from government

        763.9

        743.5

        Surplus/(deficit) attributable to the Australian Government

        (99.2)

        (31.3)

        Total other comprehensive income/(loss)

        18.1

        11.3

        Total comprehensive income/(loss) attributable to the Australian Government

        (81.1)

        (20.0)

        Total assets

        994.3

        452.6

        Total liabilities

        574.3

        127.3

        Total equity

        420.0

        325.3

           

        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

        Relevant financial statement item

        Key areas of risk

        Audit risk rating

        Factors contribution to the risk assessment

        Departmental

        Plant and equipment

        $290.6 million

        Buildings and infrastructure

        $466.3 million

        Intangibles

        $26.0 million

        Depreciation and amortisation expenses

        $131.5 million

        Measurement and recognition of Non-Financial Assets, particularly assets under construction

        Moderate

        • judgement applied by ASD in determining whether or not expenditure on assets, particularly those under construction, should be capitalised or expensed; and
        • valuation and impairment considerations for assets, particularly complex assets under construction, is subject to judgement by ASD.

        All financial statement line items

        Completeness and accuracy of transactions made by ASD’s shared service provider (Department of Defence)

        Moderate

        • significance of the reliance on the internal controls and IT processes that have been established by the shared service provider.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1a

        1

        Total

        1

        1

             

        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

        Key financial statement items

        2019–20

        ($m)

        2017–18

        ($m)

        Net (cost of)/contribution by services

        (43.7)

        (50.5)

        Revenue from government

        46.4

        50.9

        Surplus/(deficit) attributable to the Australian Government

        2.7

        0.4

        Total other comprehensive income/(loss)

        0.1

        (36.2)

        Total comprehensive income/(loss) attributable to the Australian Government

        2.8

        (35.8)

        Total assets

        1,491.4

        1,451.9

        Total liabilities

        13.0

        13.3

        Total equity

        1,478.4

        1,438.6

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Heritage and cultural assets

        $1,164.6 million

        Valuation of the collection

        Higher

        • valuation is subject to judgement and assumptions, including assessments for impairment and the unique nature of the collection having no active market; and
        • judgement is involved in determining what costs should be capitalised.
            

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total income

        922.8

        935.5

        Total expenses

        863.1

        879.1

        Profit before tax

        59.7

        56.4

        Income tax expense

        17.1

        15.5

        Net profit after income tax

        42.7

        40.9

        Other comprehensive income

        Total comprehensive income

        42.7

        40.9

        Total assets

        3,899.3

        2,314.7

        Total liabilities

        2,427.5

        747.2

        Total equity

        1,471.8

        1,567.5

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Inventories

        $755.3 million

        Valuation of inventories

        Higher

        • the high volume of properties and the complexity and detail of the model used to determine the correct valuation basis for inventory as either cost or net realisable value;
        • the uncertainty associated with the market data, including the impact of COVID-19, which is a key input into the valuation model used to calculate the net realisable value;
        • management judgement applied in determining key inputs into the valuation model used to determine net realisable value;
        • the accuracy and completeness of the inventory data held in the systems supporting the financial statements due to the volume of properties; and
        • depth of detailed judgement in applying the complex technical requirements of the financial framework for presentation and disclosure.

        Investment properties

        $2,629.6 million

        Impairment of investment properties

        Initial implication of AASB 16

         

        Higher

        • complex valuation method, multiple data sources and assumptions subject to management judgement, including determining impairment;
        • judgement to determine the correct classification of investment properties as either held for sale or non-current assets; and
        • the impact of COVID-19 on the market which impacts on the valuation.

        Initial implication of AASB 16

        Higher

        • AASB 16 is effective on 1 July 2019. Significant right-of-use (ROU) assets have been capitalised where DHA leases investment properties from third parties for provisioning to Defence; and
        • complex calculations and judgements are involved to determine the ROU asset value and the corresponding lease liability balance.

        Revenue

        $917.4 million

        Revenue recognition and the initial implication of AASB 15 Revenue from Contracts with Customers

        Moderate

        • the nature and number of the revenue streams and complexity of transactions and systems used to capture and record the financial information;
        • the number of revenue streams and volume and complexity of transactions increases the risk around the appropriateness of the recognition of revenue; and
        • the splitting of income between revenue under AASB 15 and leasing income under AASB 16 involves judgements and assumptions.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        (1)

        Total

        1

        (1)

             

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (422.3)

        (411.8)

        Revenue from government

        360.4

        374.8

        Income tax – competitive neutrality

        Surplus/(deficit) attributable to the Australian Government

        (62.0)

        (37.0)

        Total other comprehensive income

        2.9

        2.0

        Total comprehensive income/(loss) attributable to the Australian Government

        (59.1)

        (35.0)

        Total assets

        368.3

        309.0

        Total liabilities

        310.5

        220.5

        Total equity

        57.9

        88.5

           

        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

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        21,520.0

        20,742.0

        Total income

        19.0

        17.0

        Surplus/(deficit)

        (21,501.0)

        (20,725.0)

        Total other comprehensive income

        6.0

        (35.0)

        Total comprehensive income/(loss)

        (21,495.0)

        (20,760.0)

        Total assets administered on behalf of Government

        1,664.0

        1,659.0

        Total liabilities administered on behalf of Government

        34,638.0

        23,789.0

        Net assets/(liabilities)

        (32,974.0)

        (22,130.0)

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        personal benefit and healthcare provisions

        $34.4 billion

        Valuation of military compensation provision

        KAM

        Higher

         

        • judgements involved in determining the assumptions and calculations underpinning the actuarial assessment of the military compensation provision, including assumptions relating to future trends in medical costs, permanent incapacity, and inflation rates;
        • increasing value of the provision as an unfunded liability; and
        • completeness of data used to derive the valuation.

        Administered

        personal benefits expense

        $11.7 billion

        health care expenses

        $9.7 billion

         

        Accuracy of personal benefits and health care payments

        Higher

        • complexity of overseeing and maintaining a large number of IT business systems which are supported by the shared services provider, Services Australia;
        • complexity of legislation applicable to individual claims;
        • reliance on accurate and complete veteran-provided information; and
        • reliance on a risk-based quality assurance program to identify errors and initiate debt recovery arrangements in individual claims.
            

        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

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Education, Skills and Employment

        Yes

        Moderate

        3 Sept 20

        4 Sept 20

        Australian Research Council

        Yes

        Low

        7 Sept 20

        7 Sept 20

        Nil

        Australian National University

        No

        Moderate

        3 Apr 20

        14 Apr 20

               

        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

        Figure 5.4.1 shows Education, Skills and Employment portfolio income, expenses, assets and liabilities in 2019-20.

        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

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Education, Skills and Employment

        2

        2

        5

        5

        10

        Australian Research Council

        1

        3

        4

        Australian Skills Quality Authority

        1

        1

        Australian Curriculum, Assessment and Reporting Authority

        2

        2

        Australian National University

        2

        2

        2

        1

        3

        – ANU Enterprise Pty Limited

        1

        2

        3

        – Australian Scientific Instruments Pty Ltd

        1

        1

        2

        2

        Australian Institute for Teaching and School Leadership Limited

        1

        1

        1

        1

                

        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

        Key financial statements items

        2019–20

        DESE ($m)

        2018–19a

        Education ($m)

        2018–19a

        Employment ($m)

        Net (cost of)/ contribution by services

        (757.3)

        (385.4)

        (387.4)

        Revenue from government

        673.0

        365.0

        335.0

        Surplus/ (deficit) attributable to the Australian Government

        (84.4)

        (20.4)

        (52.4)

        Total other comprehensive income

        1.0

        0.2

        Total comprehensive loss attributable to the Australian Government

        (84.4)

        (19.4)

        (52.3)

        Total assets

        899.6

        168.4

        346.9

        Total liabilities

        592.5

        114.0

        129.8

        Total equity

        307.1

        54.4

        217.1

            

        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

        Key financial statements items

        2019–20

        DESE ($m)

        2018–19a

        Education ($m)

        2018–19a

        Employment ($m)

        Total expenses

        47,251.9

        39,238.0

        2,116.9

        Total income

        950.9

        6,953.2

        297.1

        Surplus/ (deficit)

        (46,301.1)

        (32,284.8)

        (1,819.8)

        Total other comprehensive income/ (loss)

        (112.1)

        225.1

        Total comprehensive income/ (loss)

        (46,413.2)

        (32,059.6)

        (1,819.8)

        Total assets administered on behalf of Government

        55,299.5

        53,568.6

        1,078.0

        Total liabilities administered on behalf of Government

        7,804.2

        7,956.1

        126.0

        Net assets

        47,495.3

        45,612.5

        951.9

            

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        Other financial assets: HELP receivable

        $46.3 billion

        HELP impairment

        $16.6 billion

        Fair value losses

        $2.6 billion

        HELP loans interest income

        $713.7 million

        The valuation of the outstanding HELP loan receivable

        KAM

        Higher

        • the balances of outstanding loans and impairment are derived from complex actuarial estimates and the estimate contains a degree of estimation uncertainty;
        • the complexity involved in estimating future income of individuals that need to repay HELP debts, the timing of expected repayments and the amount of the loan not expected to be recovered; and
        • payment data is reliant on sources external to DESE such as: the Australian Taxation Office; universities; and other third parties.

        Administered

        Provisions: HESP

        $7.1 billion

        Other receivables: HESP

        $362.0 million

        The valuation of the HESP provision and receivable

        KAM

        Higher

        • the valuation of the HESP liability is subject to an actuarial estimation process and is highly sensitive to movements in discount factors and bond rates; and
        • the valuation is complex and depends on the accurate provision of source data by universities.

        Administered

        Personal benefits: Assistance to families with children

        $8.1 billion

        Personal benefits receivable

        $390.3 million

        Personal benefits provisions

        $405.6 million

        Quantifiable contingent liabilities:

        $315.3 million

        Accuracy and valuation of assistance to families with children

        KAM

        Higher

        • complex legislation and administration arrangements that apply to child care personal benefits;
        • accounting and disclosure of year-end balances which are contingent on the lodgement of recipient’s income tax returns;
        • payments are reliant on self-assessed information provided by child care service providers and claimants; and
        • the IT environment is highly dependent on external information systems which are administered by the Department of Social Services and Services Australia.

        Administered

        all financial statement items

        IT business systems and associated processing of key financial statements information.

        Moderate

        • large and complex IT environment with business applications processing a high volume of transactions;
        • many IT systems are bespoke or heavily customised to DESE; and
        • reliance on customised reports to prepare financial statements balances.
            

        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

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        2

        (2)

        L1

        1

        (1)

        Total

        2

        1

        (3)

             

        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

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (24.7)

        (23.8)

        Revenue from government

        21.2

        21.4

        Surplus/(deficit) attributable to the Australian Government

        (3.5)

        (2.4)

        Total other comprehensive income

        Total comprehensive income/(loss) attributable to the Australian Government

        (3.5)

        (2.4)

        Total assets

        41.5

        33.5

        Total liabilities

        18.1

        9.9

        Total equity

        23.5

        23.6

           

        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

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        (782.9)

        (707.1)

        Total income

        10.1

        10.4

        Surplus/(Deficit)

        (772.8)

        (696.7)

        Total other comprehensive income/(loss)

        Total comprehensive income/(loss)

        (772.8)

        (696.7)

        Total assets administered on behalf of Government

        0.3

        0.7

        Total liabilities administered on behalf of Government

        194.2

        181.8

        Net assets/(liabilities)

        (193.8)

        (181.1)

           

        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

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        grants expense

        $779.3 million

        Completeness and accuracy of grants payments

        Moderate

        • administered grant expenses are significant to ARC’s financial statements, and the whole-of-government;
        • the high volume of grant payments and variations throughout the year increases the risks of error or fraud; and complex systems, processes and regulations exist for approval, management, payment, acquittal and reporting of administered grants;
        • the disconnect between the financial statements reporting period and the grants program reporting period, with the latter being on a calendar year basis, resulting in a significant grant liability as at 30 June; and
        • the self-assessment nature of grants management by recipients, which is monitored by an external compliance program – the Institutional Reviews.

        Computer software at $9.4 million

        Valuation of intangible assets

         

        Moderate

        • issues in relation to the annual impairment reviews undertaken, including an absence of appropriate documentation to support assessments undertaken; and
        • management assumptions to support the useful life assessments for intangible assets.
            

        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.

        5.5 Finance portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Finance

        Yes

        Moderate

        28 Aug 20

        28 Aug 20

        ASC Pty Ltd

        Yes

        Moderate

        27 Aug 20

        27 Aug 20

        Nil

        Australian Naval Infrastructure Pty Ltd

        Yes

        Moderate

        23 Sept 20

        23 Sept 20

        Nil

        Future Fund Management Agency and the Board of Guardians

        Yes

        Moderate

        29 Sept 20

        30 Sept 20

        Nil

               

        Portfolio overview

        5.5.1 The Finance portfolio is responsible for a range of finance-related functions, including providing the Australian Government with budget policy advice, responsibility for superannuation arrangements for government employees, and asset sales.

        5.5.2 The Department of Finance (Finance) is the lead entity in the portfolio and is responsible for supporting the government’s budget process and the development and implementation of the government’s regulatory frameworks for public sector resource management, governance and accountability. The department is also responsible for the preparation of the consolidated financial statements of the Australian Government, which includes the whole-of-government and the general government sector financial statements and the Australian Government’s financial outcome.

        5.5.3 Figure 5.5.1 shows the Finance portfolio’s income, expenses, assets and liabilities.

        Figure 5.5.1: Finance portfolio’s income, expenses, assets and liabilities

        Figure 5.5.1 shows the Finance portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.5.4 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 Finance portfolio.

        Table 5.5.1: The number of audit differences for entities in the Finance portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Finance

        4

        4

        ASC Pty Ltd

        1

        1

        1

        1

        – ASC AWD Shipbuilder Pty Ltd

        1

        1

        2

        2

        Australian Electoral Commission

        1

        2

        3

        Future Fund Management Agency and the Board of Guardians

        1

        1

        Independent Parliamentary Expenses Authority

        2

        2

                

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

        5.5.5 The following sections provide a summary of the 2019–20 financial statements audit results for the Department of Finance, and other material entities.

        Department of Finance

        5.5.6 Finance is responsible for supporting the government’s budget process and the development and implementation of the government’s regulatory frameworks for public sector resource management, governance and accountability. The department is also responsible for the preparation of the consolidated financial statements of the Australian Government, which includes the whole-of-government and the general government sector financial statements and the Australian Government’s financial outcome. In addition, the department provides shared services through the Service Delivery Office.

        5.5.7 Consistent with the Australian Government’s response to the COVID-19 pandemic, Finance has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include:

        • working with the Treasury to design and deliver relief and recovery measures;
        • ensuring the necessary financing for essential government services by developing appropriation bills, delivering Advances to the Finance Minister for urgent and unforeseen expenditure and supporting business through rent relief policy for commercial tenants in Commonwealth properties and updated procurement guidance; and
        • ensuring Australians had access to essential information through the Commonwealth’s COVID-19 advertising campaign, hosted the Department of Health and Smart Traveller websites, and enabled connectivity across government through the support of the National Telepresence System and GovTEAMS technology.
        Summary of financial performance

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

        Table 5.5.2: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (345.8)

        (238.4)

        Revenue from government

        283.8

        259.0

        Income tax equivalent

        (3.7)

        (4.1)

        Surplus/(deficit) attributable to the Australian Government

        (65.7)

        16.5

        Total other comprehensive income/(loss)

        (4.5)

        162.3

        Total comprehensive income/(loss) attributable to the Australian Government

        (70.3)

        178.8

        Total assets

        3,653.7

        3,071.9

        Total liabilities

        1,304.7

        731.6

        Total equity

        2,349.0

        2,340.3

           

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

        5.5.9 Finance is the Australian Government’s general insurer through the Comcover scheme. For 2019–20, Finance’s net cost of services increased due to higher insurance claims experience of $69.1 million.

        5.5.10 The increase in revenue from government is due to additional budget measures including $4.8 million for the Modernisation Fund re-profile and additional estimates funding of $15.6 million for the Shared Services Transformation Initiative (GovERP).

        5.5.11 Assets increased due to special account cash held relating to Comcover of $154.3 million mainly as a result of additional equity injection and $32.8 million relating to the property special account mainly due to divestment proceeds. There was an increase of $450.8 million right‐of‐use assets due to the implementation of AASB 16.

        5.5.12 Liabilities increased due to outstanding insurance claims driven by adverse weather events, including the January 2020 Canberra hailstorm and the 2019–20 bushfires. There was an increase of $462.2 million in lease liabilities due to the implementation of AASB 16.

        Table 5.5.3: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        11,415.4

        11,653.7

        Total income

        2,377.3

        2,600.1

        Surplus/(deficit)

        (9,038.1)

        (9,053.6)

        Total other comprehensive income/ (loss)

        (5,346.8)

        (46,146.7)

        Total comprehensive income/(loss)

        (14,384.9)

        (55,200.3)

        Total assets administered on behalf of Government

        49,913.7

        40,990.3

        Total liabilities administered on behalf of Government

        244,760.7

        235,466.0

        Net liabilities

        194,847.0

        194,475.7

           

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

        5.5.13 Total expenses decreased due to a decrease in superannuation expense and a reduction in investment fund distributions compared to the prior year including from the DisabilityCare Australia Fund and the Medical Research Future Fund.

        5.5.14 Total income decreased due to market conditions which resulted in lower dividend distributions and interest earnings.

        5.5.15 The increase in total assets is predominately associated with the growth in the investment funds to $44.2 billion from $37.1 billion, largely due to additional contributions received, partially offset by the distributions described above.

        5.5.16 Total liabilities increased by $9.3 billion primarily as a result of an increase of $8.7 billion in superannuation provisions driven by a reduction in the discount rates applied to the provision balance calculations.

        Key areas of financial statements risk

        5.5.17 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 Finance’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 5.5.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

        Table 5.5.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        superannuation provision

        $241.8 billion

        Valuation of the superannuation provision

        KAM

        Higher

        • complex calculation of each superannuation fund’s liability and sensitivity of each fund to demographic factors and other movements, such as salary growth and bond rates; and
        • reliance on the Commonwealth Superannuation Corporation for the processing of superannuation benefit payments and the provision of complete and accurate data to Finance’s actuary.

        Departmental

        insurance provision

        $590.6 million

        Valuation of the provision and the accounting for outstanding insurance claims

        KAM

        Higher

        • complex calculation based on assumptions that require significant judgement; and
        • reliance on the control environment of an external service provider for the effective management of the claims process.

        Departmental

        land and buildings (including investment properties)

        $2.0 billion

        Valuation of properties

        KAM

        Moderate

        • use of different valuation methods that require significant judgement on the selection of assumptions within the valuation models across a large portfolio of properties.
            

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

        Audit results

        5.5.18 The following table summarises the status of the audit finding reported by the ANAO in 2019–20.

        Table 5.5.5: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        1

        Total

        1

        1

             

        Source: ANAO 2019–20 audit results.

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

        New moderate audit finding

        Privileged user logging and monitoring

        5.5.20 The Service Delivery Office (SDO) is a business unit within Finance and is one of the providers of shared services for Australian Government entities. The SDO provides corporate transactional and technical services to Finance including: payroll administration, accounts payable, accounts receivable and credit cards.

        5.5.21 Privileged user accounts (managed by the SDO) include powerful access to IT applications and networks for server administrators and database administrators. These accounts include access to applications and supporting databases which can be used to bypass security controls and make changes, either to system settings or directly to data. These accounts should be restricted to appropriate personnel, attributable to a single person, and activities should be logged and monitored.

        5.5.22 The ANAO identified a number of weaknesses in the effectiveness of the SDO’s management of privileged users, including:

        • not all privileged users were subject to logging and monitoring controls; and
        • the post-activity review of privileged user activity was not always undertaken on a timely basis.

        5.5.23 These weaknesses increase the risk that inappropriate activity will not be detected. Unauthorised access to key financial systems has the potential to compromise the confidentiality and integrity of financial and other sensitive data and circumvent key business controls.

        5.5.24 The ANAO recommended that the SDO:

        • assess the appropriateness of each privileged account’s account type to limit the number of privileged accounts that can be potentially logged into by users;
        • ensure that monitoring controls are enforced over all privileged accounts; and
        • perform routine checks on these monitoring controls for the SDO to gain assurance that these controls are operating effectively.

        5.5.25 The SDO commissioned an independent review of systems, including privileged user access for the 2019–20 financial year. The results of the independent review, provided subsequent to audit testing, did not identify any privileged user access resulting in inappropriate, accidental or malicious changes to data in the 2019–20 financial year. The SDO has advised it is undertaking action to address the weaknesses identified by the ANAO. The ANAO will assess SDO’s remediation activities as part of the 2020–21 audit.

        ASC Pty Ltd

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

        5.5.27 ASC is also part of the alliance-based contract arrangement to deliver three air warfare destroyers for the RAN. This alliance is made up of the Department of Defence, representing the Australian Government, ASC as the lead shipbuilder, and Raytheon Australia as the mission systems integrator. This program is winding down as the final destroyer was delivered to the RAN on 28 February 2020.

        5.5.28 On 10 August 2018, ASC established a new subsidiary, ASC OPV Shipbuilder Pty Ltd. This company is constructing the first two ships in Australia’s new fleet of modern offshore patrol vessels (OPVs).

        Summary of financial performance

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

        Table 5.5.6: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        643.6

        699.8

        Total income

        675.9

        743.0

        Income tax expense

        9.7

        12.9

        Profit/(loss)after income tax

        22.6

        30.3

        Total other comprehensive income/(loss)after income tax

        (0.4)

        (0.2)

        Total comprehensive income/(loss) after income tax

        22.2

        30.1

        Total assets

        532.1

        432.4

        Total liabilities

        385.9

        298.1

        Net assets/(liabilities)

        146.3

        134.3

           

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

        5.5.30 The decrease in income and expenses mainly due to lower activity on the Air Warfare Destroyer program.

        5.5.31 The movement in asset and liabilities is primarily due to the initial recognition of right- of-use assets of $137.5 million and lease liabilities $139.9 million under AASB 16.

        Key areas of financial statements risk

        5.5.32 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 ASC’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 5.5.7. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.5.7: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Revenue from continuing operations

        $675.9 million

        Revenue and profit recognition in relation to the Air Warfare Destroyer and Offshore Patrol Vessel projects and the Collins Class submarine in-service support contract

        Higher

        • accounting for revenue, profit recognition, and claims in relation to these projects and contracts is complex due to the need to estimate and calculate many variables, including performance against targets. The amounts are subject to significant estimation and judgement.
            

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

        5.5.33 The performance audit report Auditor-General Report No.1 2019–20 Cyber Resilience of Government Business Enterprises and Corporate Commonwealth Entities was tabled during 2019–20 and was relevant to the financial management or administration of ASC. The results of the performance audit did not have significant implications for the financial statements audit.

        Audit results

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

        Australian Naval Infrastructure Pty Ltd

        5.5.35 Australian Naval Infrastructure Pty Ltd (ANI) was established to acquire, hold, manage and develop the infrastructure and related facilities used in connection with the Commonwealth’s continuous Naval Shipbuilding Plan. The infrastructure held by ANI at Osborne in South Australia is used by Luerssen Australia Pty Ltd for the construction of two offshore patrol vessels; ASC Shipbuilding Pty Ltd for the Hunter Class Frigate Program and by ASC Pty Ltd for maintenance of the Collins class submarines under contract arrangements with the Commonwealth, represented by the Department of Defence.

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

        5.5.37 ANI has recently completed a $535.0 million project to expand the surface shipyard at Osborne in support of the Hunter Class Frigate Program, and is also modernising existing facilities. In conjunction with Naval Group and the Commonwealth, ANI is developing a new submarine yard that will be utilised for construction of the Attack class submarines.

        Summary of financial performance

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

        Table 5.5.8: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        42.6

        33.0

        Total income

        19.1

        21.4

        Income tax benefit/(expense)

        5.4

        3.4

        Profit/(loss) after income tax

        (18.1)

        (8.2)

        Total other comprehensive income after income tax

        34.9

        Total comprehensive income after income tax

        16.8

        (8.2)

        Total assets

        1,252.4

        921.3

        Total liabilities

        70.3

        76.7

        Net assets/(liabilities)

        1,182.2

        844.5

           

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

        5.5.39 The increase in expenses of $9.6 million is primarily due to a downward revaluation of land, $6.3 million of which was reflected in profit and loss, and the disposal of obsolete assets ($4.1 million).

        5.5.40 The decrease in income is primarily due to higher interest income in 2018–19 as a result of more cash investments being held and increased rental income from the occupants of properties acquired by ANI during 2018–19.

        5.5.41 Assets increased in 2019–20 as a result of capital expenditure of $305.9 million on building shipyards and an upwards revaluation of buildings and infrastructure of $52.0 million.

        5.5.42 Liabilities decreased in 2019–20 as a result of a decline in the amount owing to construction contractors as work approaches completion.

        Key areas of financial statements risk

        5.5.43 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 ANI’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 5.5.9.

        Table 5.5.9: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Property, plant and equipment (PPE)

        $1,146.6 million

         

        Valuation of PPE

        Higher

        • valuation requires significant judgements and estimates particularly in relation to assessing the highest and best use for the assets; and
        • significant expansion of PPE holdings, including work-in-progress

        Lease income

        $16.3m

        Accuracy of lease income

        Moderate

        • significant holdings as lessor
        • introduction of new accounting standard AASB 16
            

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

        Audit results

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

        Future Fund Management Agency

        5.5.45 The Future Fund Board of Guardians, supported by the Future Fund Management Agency (together the Future Fund), is responsible for investing the assets of the Future Fund under the Future Fund Act 2006, and other investment funds, managed on behalf of the Department of Finance, under the DisabilityCare Australia Fund Act 2013, the Medical Research Future Fund Act 2015, the Aboriginal and Torres Strait Islander Land and Sea Future Fund Act 2018, the Emergency Response Fund Act 2019, and the Future Drought Fund Act 2019, for the benefit of future generations of Australians.

        Summary of financial performance

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

        Table 5.5.10: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        271.6

        242.7

        Total income

        (1,102.3)

        17,038.6

        Income tax expense

        54.5

        65.0

        Surplus/(deficit)

        (1,428.5)

        16,727.4

        Total other comprehensive income

        Total comprehensive income

        (1,428.5)

        16,727.4

        Total assets

        162,282.2

        163,615.7

        Total liabilities

        1,236.0

        1,141.1

        Net assets/(liabilities)

        161,046.2

        162,474.6

           

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

        5.5.47 Expenses have increased in 2019–20, driven by increases in fees charged by the Future Fund’s custodian of $5.5 million and other expenses of $27.1 million. Custody fees increased due to the growth in funds under management throughout the financial year and an increase in the volume of transactions and number of investments. Other expenses were higher due to the growth in information technology and investment data related expenditure. The increase in custody fees and other expenses was partially offset by a reduction in performance fees incurred on investments of $12.4 million.

        5.5.48 Total income decreased by $18.1 billion primarily due to a reduction of $3.5 billion in dividends and imputation credits received and losses on financial instruments of $4.2 billion compared to gains of $9.7 billion in the prior year.

        5.5.49 Assets decreased due to a decrease in investments of $2.13 billion attributed to the COVID-19 pandemic and the associated market volatility as well as a sale of some private equity investments during the year. This reduction was partially offset by an increase in cash of $1.4 billion.

        5.5.50 Liabilities increased due to an increase in derivative liabilities which was partially offset by a reduction in payables for unsettled purchases of investment securities.

        Key areas of financial statements risk

        5.5.51 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 Future Fund’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 5.5.11, including the area which was considered a Key Audit Matter (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.5.11: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        Investments - Collective Investments

        $72.0 billion

        Valuation of private market investments

        KAM

        Higher

        • The size of the investments and the inherent subjectivity and significant judgements and estimates required where market data is not available to determine the fair value of these investments.

        Administered

        Investments

        $84.6 billion

        Valuation of public market investments

        Moderate

        • The size of the investments and the reliance on the valuation undertaken by the custodian.
            

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

        Audit results

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

        5.6 Foreign Affairs and Trade portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Foreign Affairs and Trade

        Yes

        Moderate

        3 Sept 20

        3 Sept 20

        Nil

        Australian Trade and Investment Commission

        No

        Low

        2 Oct 20

        2 Oct 20

        Export Finance Australia

        Yes

        Moderate

        20 Aug 20

        21 Aug 20

        Nil

               

        Portfolio overview

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

        5.6.2 The Department of Foreign Affairs and Trade (DFAT) is the lead entity in the portfolio and is responsible for providing foreign, trade and development policy advice, for leading the Australian Government’s international efforts to shape the regional and international environment, and for supporting the welfare of Australians overseas.

        5.6.3 Figure 5.6.1 shows the Foreign Affairs and Trade portfolio’s income, expenses, assets and liabilities.

        Figure 5.6.1: Foreign Affairs and Trade portfolio’s income, expenses, assets and liabilities

        Figure 5.6.1 shows the Foreign Affairs and Trade portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.6.4 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 Foreign Affairs and Trade portfolio.

        Table 5.6.1: The number of audit differences for entities in the Foreign Affairs and Trade portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Foreign Affairs and Trade

        1

        1

        1

        3

        4

        Australian Centre for International Agricultural Research

        2

        2

        4

        4

        Australian Trade and Investment Commission

        1

        1

        Export Finance Australia

        1

        1

        Tourism Australia

        2

        2

        1

        1

               

        Source: Audit differences reported to entities in the Foreign Affairs Portfolio.

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

        Department of Foreign Affairs and Trade

        5.6.6 The Department of Foreign Affairs and Trade (DFAT) is the lead entity in the portfolio and is responsible for providing foreign, trade and development policy advice, for leading the Australian Government’s international efforts to shape the regional and international environment, and for supporting the welfare of Australians overseas.

        5.6.7 Consistent with the Australian Government’s response to the COVID-19 pandemic, DFAT has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures have largely focussed on assisting with the COVID-19 repatriation of Australian citizens overseas.

        Summary of financial performance

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

        Table 5.6.2: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (1,668.5)

        (1,632.7)

        Revenue from government

        1,473.2

        1,439.2

        Surplus/(deficit) attributable to the Australian Government

        (195.3)

        (193.5)

        Total other comprehensive income

        131.3

        220.5

        Total comprehensive income/(loss) attributable to the Australian Government

        (64.0)

        27.0

        Total assets

        6,192.1

        4,978.6

        Total liabilities

        1,626.6

        488.1

        Total equity

        4,565.5

        4,490.5

           

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

        5.6.9 Total assets and liabilities increased due to the initial recognition of right-of-use assets of $1.2 billion and the corresponding lease liability of $1.2 billion associated with AASB 16.

        Table 5.6.3: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        4,404.7

        4,063.5

        Total income

        583.7

        647.1

        Net cost of services

        (3,820.9)

        (3,416.4)

        Total other comprehensive income

        140.6

        240.8

        Total comprehensive income/(loss)

        (3,680.3)

        (3,175.6)

        Total assets administered on behalf of Government

        3,385.5

        3,241.0

        Total liabilities administered on behalf of Government

        1,960.6

        1,648.2

        Net assets

        1,424.9

        1,592.8

           

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

        5.6.10 Total income decreased primarily as a result of the decrease in passport revenues due to the limitations on overseas travel as a result of COVID-19 pandemic.

        5.6.11 The increase in expenses is due to increased new multilateral contributions required and the fair value adjustment on multilateral liabilities. DFAT has a range of financial assets and liabilities the most significant of which are subscription assets and grant liabilities. The subscription assets represent membership rights DFAT holds on behalf of the Australian Government for international organisations like International Development Association (IDA) and the Asian Development Fund (ADF). The grant liabilities represent the obligations the Australian Government has in relation to its aid commitments with international organisations. Valuations of assets and liabilities resulting from the Australian Government’s contribution to the international organisations are undertaken on an annual basis.

        Key areas of financial statements risk

        5.6.12 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 DFAT’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 5.6.4, 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 5.6.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        land and buildings

        $3.7 billion

        Valuation of the department’s overseas property portfolio

        KAM

        Higher

        • variety of valuation methodologies applied;
        • subject to complex estimation and judgements affected by market conditions at overseas locations and foreign exchange adjustments; and
        • the management of overseas property is undertaken by a third party through contract arrangements.

        Departmental

        sale of goods and rendering of services

        $152.5 million

        Accuracy of revenue for rental accommodation and other services provided to other Government entities at overseas posts

        Higher

        • multiple sources of revenue; and
        • revenue is assessed based on attached agencies’ staffing profiles at post, agreed floor space and other factors.

        All financial statement line items

        Completeness and accuracy of financial information associated with overseas posts

        KAM

        Moderate

        • financial information is collected through decentralised operations; and
        • locally engaged staff payments are subject to various employee conditions and benefits based on local laws and regulations.

        Departmental

        right-of-use assets

        $1.2 billion

        lease liabilities

        $1.2 billion

        Completeness and accuracy of right-of-use assets and lease liabilities.

        Moderate

        • the significant number and value of lease contracts DFAT is party to;
        • the judgement used in determining whether the lease meets the requirements for recognition; and
        • the completeness of the data used.

        Administered

        International Development Association and Asian Development Fund assets

        $2.6 billion

        Multilateral replenishments payable

        $1.7 billion

        Valuation of contributions to international organisations

        Moderate

        • significant judgements, which involve timing of future cash flows, currency and interest rate risks and selection of appropriate discount rates; and
        • complexity of the membership arrangements determines Australia’s share in the funds.
            

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

        Audit results

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

        Export Finance Australia

        5.6.14 From 1 July 2019, the Export Finance and Insurance Corporation (EFIC) began trading under the new name of Export Finance Australia. In April 2019, changes to the Export Finance and Insurance Corporation Act 1991 provided a $1 billion increase in callable capital and a new overseas infrastructure financing power. This enables Export Finance Australia to both finance more and larger projects, and expand its capabilities to regional infrastructure projects that have a broad national benefit for Australia, including for Australian businesses. The role and mandate continues to evolve.

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

        5.6.16 Consistent with the Australian Government’s response to the COVID-19 pandemic, Export Finance Australia has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include additional lending programs aimed at helping previously profitable Australian exporters whose business have been impacted by COVID-19 pandemic. This program totals $500 million and will be issued through the National Interest account.

        Summary of financial performance

        5.6.17 The following section provides a comparison of the 2018–19 and 2019–20 key departmental financial statements items reported by Export Finance Australia. These have been split to provide detail on the commercial account and the national interest account and includes commentary regarding significant movements between years contributing to overall performance.

        Table 5.6.5: Commercial account financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        163.7

        200.2

        Total income

        179.7

        237.0

        Net profit/(loss) before tax equivalent

        16.0

        36.8

        Income tax equivalent charge

        4.8

        11.0

        Net profit/(loss) available to the Commonwealth

        11.2

        25.8

        Total other comprehensive income/(loss)

        61.7

        Total comprehensive income/(loss) for the period available to the Commonwealth

        11.2

        87.5

        Total assets

        3,340.4

        3,359.2

        Total liabilities

        2,803.3

        2,819.9

        Total equity

        537.1

        539.3

           

        Source: Export Finance Australia’s audited financial statements for the year ended 30 June 2020.

        5.6.18 The decrease in income and expenses is reflective of normal business activity and attributable to decrease in average interest rates on investments and borrowings over the period. This is consistent with interest rate movements seen in the wider market. The decrease in total other comprehensive income is attributable to a revaluation increment for land and buildings which was recognised in prior years.

        Table 5.6.6: National interest account financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        19.2

        16.8

        Total income

        51.7

        50.9

        National Interest Account attributable to the Australian

        Government

        32.5

        34.1

        Total assets administered on behalf of Government

        851.0

        370.9

        Total liabilities administered on behalf of Government

        851.0

        370.9

        Net assets

           

        Source: Export Finance Australia’s audited financial statements for the year ended 30 June 2020.

        5.6.19 The offsetting increases in total assets and total liabilities is due to the additional loans that were issued to Papua New Guinea during 2019–20 as well as some other small loans. Loans from the commercial account represent $832.3 million of the national interest account liabilities as at 30 June 2020.

        Key areas of financial statements risk

        5.6.20 The ANAO completed appropriate audit procedures on all material items as part of the 2019–20 audit. The ANAO also assessed the IT general and application controls for key systems that support the preparation of Export Finance Australia’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 Table 5.6.7. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.6.7: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Commercial account

        financial instruments - loans and receivables

        $2.1 billion

        Impairment of loans and receivables

        Moderate

        • complex measurement, classification and disclosure requirements; and
        • subject to estimation and judgement including the credit risk exposure for key loans which has increased due to COVID-19.

        Commercial account

        financial instruments

        financial assets

        $3.2 billion

        financial liabilities

        $2.7 billion

        Valuation and classification of financial instruments

        Moderate

        • complex measurement which involves derivatives, available for sales financial instruments, borrowings and loans and receivables; and
        • subject to estimation and judgement in assessing the reasonableness of the valuation assumptions and inputs to independent sources.

        Commercial and National Interest Account

        Total net interest income $19.7m

        Completeness and accuracy of interest income recognised

        Moderate

        • multiple loans with different terms, conditions and counterparties;
        • reliance on the loan management system (Reval) to correctly calculate interest due;
        • accuracy of inputs recorded in the Reval system for new loans; and
        • completeness and accuracy of data transfer from Reval to the Financial Management System.
            

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

        Audit results

        5.6.21 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 Trade and Investment Commission

        5.6.22 The Australian Trade and Investment Commission (Austrade) is responsible for promoting Australian trade, investment and education to the world, as well as helping secure Australia’s tourism industry. It undertakes this responsibility by promoting Australian exports and international education, strengthen the Australia’s tourism sector, and attract investment into Australia.

        New moderate audit finding

        Timeliness of financial statement preparation

        5.6.23 During the final phase of the audit, the ANAO identified that there were inadequate resources to provide completed financial statements and associated supporting workpapers. This lead to significant changes in the financial statement disclosures and late adjustments but also a deficiency in the timely preparation of workpapers to support the financial statements and associated notes.

        5.6.24 We note that the Australian Trade and Investment Commission had provided additional resourcing to financial statements preparation including the introduction of a soft close. These efforts were offset against the need for additional resourcing requirements for new programs and the need to implement new accounting standards.

        5.6.25 The Australian Trade and Investment Commission will undertake a lessons learnt, and the development of a more granular plan for the completion of the 2020–21 financial statements.

        5.7 Health portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Health

        Yes

        Moderate

        7 Sept 20

        9 Sept 20

        Australian Digital Health Agency

        No

        High

        28 Sept 20

        29 Sept 20

        National Blood Authority

        Yes

        Low

        2 Sept 20

        3 Sept 20

        Nil

        National Health and Medical Research Council

        Yes

        Low

        26 Aug 20

        26 Aug 20

               

        Portfolio overview

        5.7.1 The Health portfolio works towards achieving better health and wellbeing for all Australians, now and for future generations.

        5.7.2 The Department of Health (Health) is the lead entity in the portfolio. It is responsible for achieving the Australian Government’s health outcomes in the areas of health system policy, design and innovation; health access and support services; sport and recreation; individual health benefits; regulation, safety and protection; and ageing and aged care. This includes administering programs and services, such as Medicare and the Pharmaceutical Benefits Scheme, and forming partnerships with the states and territories as well as other stakeholders.

        5.7.3 Figure 5.7.1 shows the Health portfolio’s income, expenses, assets and liabilities.

        Figure 5.7.1: Health portfolio’s income, expenses, assets and liabilities

        Figure 5.7.1 shows the Health portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.7.4 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 Health portfolio.

        Table 5.7.1: The number of audit differences for entities in the Health portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Health

        4

        4

        1

        1

        Aged Care Quality and Safety Commission

        2

        2

        2

        2

        Australian Commission on Safety and Quality in Health Care

        1

        1

        Australian Digital Health Agency

        2

        1

        3

        Australian Institute of Health and Welfare

        1

        1

        1

        1

        2

        Australian Sports Anti-Doping Authority

        3

        3

        Australian Sports Commission

        1

        1

        Cancer Australia

        1

        1

        Food Standards Australia New Zealand

        2

        5

        7

        Independent Hospital Pricing Authority

        2

        2

        1

        1

        2

        National Blood Authority

        9

        9

        1

        1

        National Health Funding Body

        3

        3

        1

        1

        National Mental Health Commission

        1

        1

        1

        1

        Australian Organ and Tissue Donation and Transplantation Authority

        1

        1

        Professional Services Review Scheme

        1

        1

        1

        1

        Australian Sports Foundation Limited

        1

        1

               

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

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

        Department of Health

        5.7.6 The Department of Health (Health) is responsible for achieving the Australian Government’s health and ageing priorities through evidence-based policy, program administration, research, regulatory activities, and partnerships with other government entities, consumers and stakeholders.

        5.7.7 Consistent with the Australian Government’s response to the COVID-19 pandemic, Health implemented a range of measures aimed at supporting members of the Australian public who were likely to be impacted by the COVID-19 pandemic. These measures included increased purchasing for the National Medical Stockpile, the expansion of the Telehealth function of the Medicare Benefits Scheme and program, additional support for senior Australians in Aged Care and Home Care, additional support to hospitals in diagnosing and treating COVID-19, and the expansion of mental health support and treatment.

        5.7.8 To deliver these measures, Health implemented changes to Governance arrangements and key internal controls which included establishment of COVID-19 Governance working group with responsibility for oversight of portfolio initiatives implemented relating to the response to COVID-19 and the temporary transfer and redeployment of 234 staff to assist with the National Incident Response team, at the centre of the Government’s COVID-19 response.

        Summary of financial performance

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

        Table 5.7.2: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (714.9)

        (733.9)

        Revenue from government

        674.0

        705.4

        Surplus/(deficit) attributable to the Australian Government

        (40.9)

        (28.5)

        Total other comprehensive income/(loss)

        (0.4)

        Total comprehensive income/(loss) attributable to the Australian Government

        (41.3)

        (28.5)

        Total assets

        1,051.6

        419.0

        Total liabilities

        870.9

        335.4

        Total equity

        180.7

        83.6

           

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

        5.7.10 Net cost of services has marginally improved primarily due to a $8.4 million increase in the amount of fees collected by the Therapeutic Goods Administration for the year compared to the prior year, a $23.4 million decrease in employee benefits due to a decrease in staff numbers and the lower bond rate adjustment in leave expenses as well as a $29.0 million decrease in supplier expenses primarily due to the de-recognition of operating lease expenses due to the application of AASB 16. This was also offset by an increase of $65.1 million in depreciation expense as a result of application of AASB 16.

        5.7.11 Revenue from government decreased as a result of $24.9 million grant funding revenue recognised in the prior year that was funded out of current year’s budget funding, and $2.2 million appropriation transfer for the Aged Care Quality and Safety Commission employee entitlements this was offset by additional funding of $9.1 million provided in response to COVID-19.

        5.7.12 The increase in assets and liabilities is due to the initial application of AASB 16 and the recognition of the associated right-of-use assets of $568.1 million and lease liabilities of $579.4 million.

        Table 5.7.3: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        73,387.1

        69,710.6

        Total income

        41,803.1

        39,501.2

        Surplus/(deficit)

        (31,584.0)

        (30,209.4)

        Total other comprehensive income/(loss)

        33.2

        (61.2)

        Total comprehensive income/(loss)

        (31,550.8)

        (30,270.6)

        Total assets administered on behalf of Government

        6,427.1

        3,471.4

        Total liabilities administered on behalf of Government

        3,039.1

        2,975.4

        Net assets/(liabilities)

        3,388.0

        496.0

           

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

        5.7.13 The increase in expenses was primarily due to $660.4 million additional support provided for Home and Residential aged care related subsidies in line with additional funding provided in the 2019–20 budget, $330.0 million COVID-19 specific expenditure primarily in the Primary Health Care and the Health Protection and Emergency Response programs, In addition, a $2.3 billion increase in personal benefits primarily reflecting increases in Medicare funding of $605.8 million to strengthen the system with lower out of pocket expenses, a $764.3 million increase in the Pharmaceutical Benefits Scheme (PBS) due to investment in new medicine listings and $878.8 million additional investment in aged care funding. These personal benefit expenses were partially matched by higher revenue for Medicare and PBS funding.

        5.7.14 The increase in assets is primarily due to the $1.9 billion increase in inventories and prepayments associated with the National Medical Stockpile (NMS) as part of the Governments emergency response to the COVID-19 pandemic.

        Key areas of financial statements risk

        5.7.15 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 Health’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 5.7.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

        Table 5.7.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        subsidies

        $13.4 billion

        Accuracy of Residential Care subsidies

        KAM

        Higher

        • payment of aged care subsidies to nursing home providers are based on Aged Care Funding Instrument assessments prepared by the same providers and involve judgements regarding the level of patient care.

        Administered

        personal benefits

        $48.6 billion

        Accuracy of personal benefit payments including medical benefits and pharmaceutical benefit payments

        KAM

        Higher

        • volume and complexity of health care payments with varying eligibility requirements; and
        • processed by Services Australia on complex IT systems.

        Administered

        recoveries

        $2.8 billion

        Completeness and accuracy of Pharmaceutical Benefits Scheme recovery revenue

        Moderate

        • manual calculation of complex information in spreadsheets; and
        • reliance on data sourced from the Services Australia and complex arrangements in place with pharmaceutical companies for recovery of expenditure.

        Administered

        personal benefits provisions

        $972 million

        subsidies provision

        $458.0 million

        Valuation of the Medical Indemnity and Medicare and Pharmaceuticals Outstanding Claims provisions

        KAM

        Moderate

        • judgements over future claims and economic assumptions including discount rate and future claims that underpin the estimation indemnity provisions and rely on the quality of underlying data.

        Administered

        grants expense

        $9.2 billion

        Accuracy and occurrence of grant payments.

        Moderate

        • significant number of grant programs are administered by Health with different eligibility criteria.

        Administered Inventory

        $907 million

        Accuracy, existence and completeness of inventory balances

        Moderate

        • significant increase in the purchasing activity of personal protective equipment inventory resulting in the balance being material to the financial statements
        • higher number and wider variety of inventory items being managed raising the risk over accurate recording of the balance
        • complexity and management expertise required to assess and identify impaired or obsolete items

        Departmental

        Revenue from contracts with customers

        $191.1 million

        Estimation of Revenue related to the Therapeutic Goods Administration

        Moderate

        • the estimation of revenue under the Therapeutic Goods Act (TGA) 1989 involves judgements and assumptions related to the assessment of registration and conformity fees.
            

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

        Audit results

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

        Table 5.7.5: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        2

        (1)

        2

        Total

        1

        2

        (1)

        2

             

        Source: ANAO 2019–20 audit results.

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

        New moderate audit findings

        User Access Controls – Terminated Users

        5.7.18 During the 2019–20 interim audit, the ANAO’s testing identified weaknesses in the Health’s security controls relating to terminated users being removed or suspended on the same day as they no longer have legitimate requirement for access. During the final phase the ANAO identified that there were a number of users who retained access to the SAP system post termination and a small number of these had accessed the system to print, email and access HR self-service post termination.

        5.7.19 Health has implemented the Staff Admin system, which collects corporate data from SAP and authoritative sources of truth, in order to share identify information and controls access to Health’s systems in a reliable and consistent way. The system removes the need to manually enter information to IT systems, reducing the risk of error or misconfiguration. In January 2020 the staff admin de-provisioning functionality was implemented; this removes access automatically when a staff member’s end date is reached. De-provisioning of an account prior to a staff member’s end date or for ongoing APS is reliant on the manager submitting the request to off board in SAP which is consistent with requirements in Health’s policy. Enhancements to SAP are underway to notify the IT Security Advisor when a user account is terminated prior to a staff member’s expected last working day. Upon receipt the account will be terminated and a review of relevant account loges will ensure that no unauthorised access occurred after their last working date. This will be assessed as part of the 20-21 financial statement audit process.

        National Medical Stockpile – recording and management

        5.7.20 During the 2019–20 final audit, the ANAO’s testing identified weaknesses in Health’s recording and management of the National Medical Stockpile (NMS). These included: the inventory management system supporting the NMS not being fit for purpose; absence of reconciliations between the Health FMIS and inventory records and financial reporting by product and location for the last quarter of the financial year; a number of errors in the manually entered excel inventory register; and lack of frequency in stock taking processes, delays in provisions of stock take methodology and timely resolution of stock take variation.

        5.7.21 Health will seek to develop a solution incorporating reconciliations between Health FMIS and warehouse vendor records and a rolling program for stock take that best suits the nature of the stock pile.

        National Blood Authority

        5.7.22 The National Blood Authority (NBA) is responsible for securing the supply of safe and affordable blood products, including through national supply arrangements and coordination of best practice standards within agreed funding policies under the national blood arrangements.

        Summary of financial performance

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

        Table 5.7.6: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (6.0)

        (6.4)

        Revenue from government

        5.7

        5.7

        Surplus/(deficit) attributable to the Australian Government

        (0.3)

        (0.7)

        Total other comprehensive income

        Total comprehensive income/(loss) attributable to the Australian Government

        (0.3)

        (0.7)

        Total assets

        13.3

        11.5

        Total liabilities

        5.1

        3.9

        Total equity

        8.2

        7.6

           

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

        5.7.24 Total assets and liabilities increased as a result of the initial application of AASB 16 and the associated recognition of right-of-use assets of $1.6 million and interest bearing liabilities of $1.6 million. Total liabilities was slightly offset by a decrease in trade payables of $0.7 million.

        Table 5.7.7: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        1,177.6

        1,196.1

        Total income

        1,214.4

        1,207.9

        Surplus/(deficit)

        36.8

        11.8

        Total other comprehensive income/(loss)

        Total comprehensive income/(loss)

        36.8

        11.8

        Total assets administered on behalf of Government

        549.9

        510.0

        Total liabilities administered on behalf of Government

        160.0

        57.7

        Net assets/( liabilities)

        390.2

        452.3

           

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

        5.7.25 Expenses decreased due to a decrease in demand for blood products which in turn resulted in higher inventory levels contributing to the increase in assets.

        5.7.26 Liabilities increases as a result of the application of AASB 15 Revenue from Contracts with Customers and the subsequent recognition of deferred revenue under the new standard. The revenue has been deferred as the conditions attached from the contributions from the Commonwealth and States and Territories in relation to the delivery of blood services has not been met at year end.

        Key areas of financial statements risk

        5.7.27 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 NBA’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 5.7.8. No significant or moderate audit findings were identified relating to the key area of risk.

        Table 5.7.8: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        inventories

        $114 million

        Existence and Valuation of Inventory

        Moderate

        • judgements and assumptions involved in the valuation of blood and blood products; and
        • the geographical spread of inventory and reliance on service providers to manage the inventory holdings.
            

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

        Audit results

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

        National Health and Medical Research Council

        5.7.29 The National Health and Medical Research Council (NHMRC) is the Australian Government’s key entity for managing investment in, and integrity of, health and medical research. NHMRC is also responsible for developing health advice for the Australian community, health professionals and governments, and for providing advice on ethical practice in health care and in the conduct of health and medical research.

        Summary of financial performance

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

        Table 5.7.9: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (32.3)

        (38.6)

        Revenue from government

        37.5

        37.6

        Surplus/(deficit) attributable to the Australian Government

        5.2

        (1)

        Total other comprehensive income

        Total comprehensive income/(loss) attributable to the Australian Government

        5.2

        (1)

        Total assets

        56.4

        27.4

        Total liabilities

        35.3

        13.7

        Total equity

        21.1

        13.7

           

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

        5.7.31 The decrease in net cost of services mainly due to an increase in revenue from the Department of Health for managing increased grant activity on their behalf.

        5.7.32 Assets and liabilities have mainly increased as a result of the recognition of $24.0 million right-of-use assets and $24.0 million lease liabilities on application of AASB 16.

        Table 5.7.10: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        909.9

        894.7

        Total income

        5.7

        7.8

        Deficit

        (904.1)

        (886.9)

        Total other comprehensive income/(loss)

        Total comprehensive income/(loss)

        (904.1)

        (886.9)

        Total assets administered on behalf of Government

        198.9

        243.0

        Total liabilities administered on behalf of Government

        11.1

        5.8

        Net assets/(liabilities)

        187.8

        237.2

           

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

        5.7.33 Total expenses increased due to $13.0 million increase in Medical Research Grants. Total assets has decreased due to a reduction in cash as a result of increased grants from the transition to new grants program and grant payments made for Boosting Dementia Research.

        Key areas of financial statements risk

        5.7.34 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 NHMRC’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 5.7.11.

        Table 5.7.11: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        grant expenses

        $901.6 million

        Management and accounting of grant expenditure

        Moderate

        • management of, and accounting for, a range of grants payments that constitute a significant expense reported in the NHMRC’s financial statements; and
        • complexities associated with the indexing of grant payments.

        Departmental

        intangibles

        $18.7 million

        Management and valuation of intangible assets

        Moderate

        • significant judgements involved in considering the indicators of impairment to estimate the value of intangible assets; and
        • judgements involved in estimating the capitalisation of the staff and other costs attributed to developing the software applications.
            

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

        Audit results

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

        Table 5.7.12: Status of audit finding

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        (1)

        Total

        1

        (1)

             

        Source: ANAO 2019–20 audit results.

        Resolved moderate audit finding

        User access management – monitoring of third party access to IT systems

        5.7.36 During the 2016–17 audit, the ANAO’s testing of user access to NHMRC’s information technology (IT) systems, including the Financial Management Information System (FMIS), identified that external vendors have privileged user access to NHMRC’s IT Infrastructure (Network, Databases and Operating Systems) and the FMIS. The activities performed by these vendors were not logged and, as a result, no regular monitoring of user activities was performed by NHMRC. Additionally, there were no regular monitoring controls in place at NHMRC to ensure that vendors’ activities are compliant with NHMRC’s policy and procedures.

        5.7.37 NHMRC implemented a centralised logging solution, which allows logging of administrative privilege activities. The implementation of event-based alerts, dashboards and scheduled reports are periodically reviewed, and the log analysis and monitoring functionality is being used to generate reports to perform targeted reviews to address IT operational and financial risks.

        Comments on non-material entities

        Australian Digital Health Agency

        5.7.38 The Australian Digital Health Agency (Digital Health) has responsibility for the strategic management and governance of the National Digital Health Strategy and the design, delivery and operations of the national digital healthcare system including the My Health Record system.

        Resolved significant audit findings

        Integrity of Financial Reporting

        5.7.39 As part of the 2018–19 audit, the ANAO reviewed the operational effectiveness of Digital Health’s controls related to financial reporting and supplier and contract management, with a particular focus on financial transactions occurring at year-end. Control weaknesses in Digital Health’s contract and supplier management and financial reporting processes resulted in material adjustments to Digital Health’s financial statements being identified by the ANAO.

        5.7.40 The ANAO recommended that governance and internal control processes around supplier and contract management are strengthened to include: regular management reporting against budget; appropriate quality assurance checks including the performance of supporting analytical procedures to explain significant year-end movements and detailed analysis to corroborate large payable balances against supporting information that demonstrates that the goods or services have been received; ensuring appropriate approval of invoices and receipting of goods and services before invoices are processed.

        5.7.41 During 2019–20, Digital Health effectively implemented these recommendations. As a result, the prior year audit finding has been resolved.

        5.8 Home Affairs portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Home Affairs

        Yes

        High

        07 Sept 20

        08 Sept 20

        Australian Federal Police

        Yes

        Moderate

        16 Sept 20

        16 Sept 20

        Australian Security Intelligence Organisation

        Yes

        Moderate

        06 Aug 20

        06 Aug 20

        Nil

               

        Portfolio overview

        5.8.1 The Home Affairs portfolio brings together Australia’s federal law enforcement, national and transport security, criminal justice, cybersecurity, border, immigration and citizenship, emergency management, multicultural affairs, and settlement services functions and agencies.

        5.8.2 The Department of Home Affairs is the lead entity in the portfolio and is responsible for managing the movement of non-citizens, implementing visa, citizenship, multicultural affairs, and refugee and humanitarian assistance programs, facilitating international trade and collecting border revenue. It also deals with national security and law enforcement policy and operations, transport security, critical infrastructure protection coordination, protective services at Commonwealth establishments and diplomatic and consular premises in Australia, and cyber policy coordination, as well as emergency management and natural disaster assistance.

        5.8.3 On 5 March 2020, the Australian Government activated the National Coordination Mechanism (NCM) in response to the spread of COVID-19. The NCM operates through the Department of Home Affairs and, together with the states and territories, coordinates the whole-of-government response to issues outside the direct health management of COVID-19.

        5.8.4 The department also includes the Australian Border Force, which is responsible for border, investigatory, compliance, detention (facilities and centres) and enforcement functions, as well as Australia’s customs functions. In light of the portfolio’s focus on law enforcement and security, maintaining a high integrity culture, including compliance, is critical.

        5.8.5 Figure 5.8.1 shows the Home Affairs portfolio’s income, expenses, assets and liabilities.

        Figure 5.8.1: Home Affairs portfolio’s income, expenses, assets and liabilities

        Figure 5.8.1 shows the Home Affairs portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.8.6 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 Home Affairs portfolio.

        Table 5.8.1: The number of audit differences for entities in the Home Affairs portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Home Affairs

        1

        2

        3

        5

        1

        6

        Australian Criminal Intelligence Commission

        1

        1

        Australian Federal Police

        2

        2

        4

        4

        Australian Institute of Criminology

        2

        2

        Australian Security Intelligence Organisation

        2

        2

        2

        2

        Australian Transaction Reports and Analysis Centre

        1

        3

        4

        3

        3

               

        Source: Audit differences reported to entities in the Home Affairs portfolio.

        5.8.7 The following sections provide a summary of the 2019–20 financial statements audit results for Home Affairs, and other material entities.

        Department of Home Affairs

        5.8.8 The Department of Home Affairs (Home Affairs) coordinates policy and operations for Australia’s national and transport security, federal law enforcement, criminal justice, cyber security, border, immigration, multicultural affairs, emergency management and trade-related functions.

        5.8.9 Consistent with the Australian Government’s response to the COVID-19 pandemic, the Department of Home Affairs implemented a number of measures aimed at supporting members of the Australian public. This has included:

        • establishment of the NCM to coordinate and facilitate nationally consistent approaches to non-health related planning and responses to the COVID-19 pandemic. This included addressing complex issues such as the movement of resources, sector personnel and goods across domestic borders, supporting vulnerable people and managing the repatriation of Australian citizens, permanent residents and their immediate relatives to Australia;
        • establishment of the Supermarket Taskforce that brought together major supermarket executives, relevant peak bodies, states, territories and local authorities to discuss and resolve issues supermarkets were facing due to COVID-19 and to ensure all Australians could continue to access essential items;
        • implementation of enhanced biosecurity and border control measures for trade and travel;
        • working with the Department of Foreign Affairs and Trade and Department of Health to bring Australians home on Government-assisted repatriation flights;
        • establishment of quarantine facilities; and
        • implementation of a new regime to manage an exemptions process which permitted international travel in a limited set of circumstances.

        5.8.10 While this has not resulted in any payments to the Australian public or changes to existing financial management internal controls, the department has reprioritised workflows to facilitate the above initiatives.

        Summary of financial performance

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

        Table 5.8.2: Key departmental financial statements items

        Key departmental financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (3,148.4)

        (3,008.6)

        Revenue from government

        2,723.9

        2,663.9

        Surplus/(deficit) attributable to the Australian Government

        (424.5)

        (344.7)

        Total other comprehensive income

        32.9

        3.2

        Total comprehensive income/(loss) attributable to the Australian Government

        (391.6)

        (341.5)

        Total assets

        3,669.3

        2,145.8

        Total liabilities

        2,500.7

        914.9

        Total equity

        1,168.6

        1,230.9

           

        Source: Home Affairs’ audited financial statements for the year ended 30 June 2020.

        5.8.12 The movement in net cost of services predominantly relates to an increase in employee benefits of $32.4 million, write-down and impairment of non-financial assets of $26.3 million and financial costs of $20.8 million.

        5.8.13 The increase in total assets and liabilities is predominantly the result of the first time recognition of right-of-use assets of $1.6 billion and $1.7 billion of lease liabilities as a result of AASB 16. The increase in liabilities was partially offset by the de-recognition of $101.4 million in lease incentives and $24.2 million in operating lease payables on transition to AASB 16.

        Table 5.8.3: Key administered financial statements items

        Key administered financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        2,582.9

        2,044.8

        Total income

        23,030.3

        20,007.4

        Surplus/(deficit)

        20,447.3

        17,962.6

        Total other comprehensive income

        (42.6)

        6.8

        Total comprehensive income/(loss)

        20,404.7

        17,969.4

        Total assets administered on behalf of Government

        1,286.1

        1,745.0

        Total liabilities administered on behalf of Government

        438.4

        441.1

        Net assets/(liabilities)

        847.7

        1,303.9

           

        Source: Home Affairs’ audited financial statements for the year ended 30 June 2020.

        5.8.14 Total expenses increased as a result of:

        • supplier expenses increasing by $193.7 million predominantly in relation to an increase in support and settlement services driven by a transfer of functions into the Department from 1 July 2019 as a result of machinery of government changes. This included settlement services for refugees and humanitarian migrants of $126.0 million from Department of Social Services and adult migrant education of $218.0 million transferring from the Department of Education. The increase is partially offset by a reduction in garrison and accommodation expenses of $181.0 million as a result of the transition arrangements for offshore management in Papua New Guinea;
        • an increase of $163.6 million in personal benefits payments made to victims of natural disasters as a result of an increase in natural disasters in 2019–20, in particular the extended bushfire season; and
        • gifting grants and contributions increasing by $163.2 million, mainly due to the first time payment of $47.8 million under the Remote Airport Screening Fund and payment of $42.5 million relating to settlement engagement and transition support responsibilities that were assumed by the Department under a machinery of government change from 1 July 2019. Other increases related to higher payments made for the Safer Communities and National Aerial Firefighting initiatives and the gifting of the Bomana Immigration Centre to the Government of Papua New Guinea valued at $21.7 million.

        5.8.15 Administered income increased mainly due to a $3.6 billion increase in customs duty largely as a result of the implementation of changes from 1 July 2019 relating to duty collected on tobacco as a result of the Black Economy Package – combating illicit tobacco. The increase in customs duty was partially offset by a reduction in visa application charges by $173.3 million and passenger movement charges by $328.7 million. The reduction in these revenue streams was the result of international travel restrictions in response to the COVID-19 pandemic.

        5.8.16 Total assets decreased predominately due to a $331.7 million decrease in taxation receivable as a result the implementation of changes from 1 July 2019 relating to tobacco and a decrease of $189.2 million in non-financial assets as a result of annual depreciation charges of $105.6 million, write-downs of $48.2 million, a revaluation decrement of $42.6 million resulting from an independent valuation of property, plant and equipment in 2019–20 and gifting of public property of $21.7 million.

        Key areas of financial statements risk

        5.8.17 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 Home Affairs’ 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 5.8.4, including areas which were considered Key Audit Matters (KAM) by the ANAO.

        Table 5.8.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        customs duty revenue $19.5 billion

        taxation receivable - customs duty $122.0 million

        Completeness and accuracy of customs duty collections and refunds

        KAM

        Higher

        • the significant value of customs duty revenue;
        • the self-assessment nature of the import declaration process;
        • reliance on compliance risk management processes over the completeness of revenue; and
        • the complexity of the information technology (IT) environment used to manage customs duty.

        Administered

        visa application charges $2.2 billion

        Completeness and accuracy of the collection of visa revenue

        KAM

        Higher

        • the significant value of visa application charges;
        • the decentralised approach to the collection of visa revenue which occurs in a number of locations domestically and internationally, using a number of payment mechanisms; and
        • the complexity of the IT environment used to collect and process visa application charges.

        Administered

        services rendered - detention (component of supplier expenses) $1.7 billion

        Accuracy of detention and regional processing centres expenses

        KAM

        Higher

        • the significance of expenses and complexity of contracts associated with managing the detention and regional processing centres; and
        • the variability of the costs associated with administering the detention and regional processing network, as the level of expenses is dependent on the rate of arrival and detention of these people.

        Administered

        SRSS personal benefits expenses (a component of personal benefits expenses) $428.3 million

        Completeness and accuracy of payments of personal benefits under the Status Resolution Support Services (SRSS) program

        Moderate

        • complex eligibility criteria for the categories of allowable personal benefits;
        • payments are made under third-party arrangements with Services Australia and other providers; and
        • the self-assessment nature of the personal benefits process.

        Administered

        Non-financial assets relating to detention and regional processing centres (i.e. excluding computer software and prepayments) $855.0 million

        Valuation of detention and regional processing centres

        Moderate

        • the complexity of performing valuations in a range of markets given the geographically dispersed land, buildings and equipment including assets located overseas; and
        • the financial implications of the closure of regional processing centres.

        Departmental

        employee benefits expense $1.6 billion

        employee provisions $516.4 million

        Completeness and accuracy of employee entitlements

        Moderate

        • selected Home Affairs staff are entitled to a range of allowances, subject to a number of conditions; and
        • staff are located both in Australia and overseas, including locally engaged staff who may be entitled to varying employment conditions and benefits based on local laws and regulations.

        Administered and Departmental

        Multiple financial statement line items

        Completeness and accuracy of financial information associated with overseas posts

        Moderate

        • decentralised nature of operations and controls; and
        • managed under third party arrangements through service level agreements with the Department of Foreign Affairs and Trade, and the Australian Trade and Investment Commission (Austrade).
            

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

        Audit results

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

        Table 5.8.5: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Significant (A)

        1

        (1)a

        Moderate (B)

        2a

        2

        Total

        1

        2

        1

        2

             

        Note a: The significant audit finding relating to Visa and Citizenship Quality Management 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 moderate audit finding and reported to Parliament in Auditor-General Report No.38 of 2019–20 Interim Report on Key Financial Controls of Major Entities.

        Source: ANAO 2019–20 audit results.

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

        New and unresolved moderate audit findings

        Management of Staff Leave

        5.8.20 As detailed in Chapter 4, in 2019–20 the ANAO undertook targeted assurance activities over the management of staff leave within Home Affairs. The activities were performed to facilitate an assessment of compliance of the management of leave accruals, and balances with human resource policies and requirements. The areas assessed are outlined at chapter four, paragraph 4.9.

        5.8.21 The 2019–20 audit identified:

        • Home Affairs leave policy has not been updated to include current leave information or the requirements and conditions under the 8 February 2019 Department of Home Affairs Workplace Determination 2019;
        • the Policy and Procedural Control Register (which includes all underpinning legislation and requirements, including specific requirements relating to staff leave and link to specific controls relating to leave) is not up to date to reflect the Department’s controls;
        • 30 per cent of leave taken for foreseeable leave types (including annual, long service, purchased, study, time off in lieu, maternity and parental leave) was not supported by evidence within the HRMIS of approval in advance of that leave commencing – as required by the Home Affairs leave policy;
        • 18,181 instances of non-compliance with the department’s policy that unforeseeable leave types (personal leave, bereavement, primary care, parental care and miscellaneous leave) be approved or resolved within 30 days of the employee returning to work. Furthermore, 8,947 were approved more than 90 days after the last day of leave;
        • 7.9 per cent of employees held excessive annual leave balances as defined by the workplace determination (i.e. exceeding 40 days) and 21.8 per cent of employees held an excessive flexible leave balance as defined by the workplace determination (i.e. maximum credit of 37.5 hours and maximum debit of 10 hours); and
        • inconsistencies in the application of other policies and procedures.

        5.8.22 Home Affairs’ employee benefit transactions are high volume and involve both automated and manual processing. While Home Affairs has identified supervisor assurance as the primary control in the management of staff leave, the number of exceptions noted and anomalies identified relating to instances of non-compliance to relevant policies and procedures observations may indicate monitoring and reporting controls were not effective in identifying weaknesses in associated controls and instances of non-compliance to relevant policies and procedures.

        5.8.23 The ANAO concluded that the control weaknesses pose potential moderate operational and financial reporting risks and recommends that Home Affairs:

        • update leave policies to include current leave information or the requirements and conditions under the 8 February 2019 Department of Home Affairs Workplace Determination 2019;
        • implement strategies to increase compliance by employees;
        • further enhance its Policy and Procedural Control Register and link to specific controls relating to leave. This will refine the Department’s current processes and controls, including identifying any manual controls that can be automated; and
        • strengthen monitoring and reporting controls, including: enhancement of the Executive Dashboard reporting; provide further assurance over rates of compliance; and facilitate consistency in application of leave entitlements, targeted responses for non-compliance and effective planning and utilisation of human resources.

        5.8.24 Home Affairs has agreed to the recommendations however, disagreed with the rating of the finding.

        Visa and Citizenship Quality Management

        5.8.25 Home Affairs established a Secretary Instruction and Quality Management Policy to mandate regular quality assurance reviews to improve consistency in decision making and ensure the effective identification and management of emerging business risks relating to the assessment and issuance of visas and citizenship. Consistent with this Instruction and Policy, a Visa and Citizenship Quality Management Framework (VCQMF) was established in 2014.

        5.8.26 The 2018–19 audit identified:

        • throughout the international posts and visa program areas, there was significant non-compliance with the required quality assurance sample rate;
        • there is no evidence of alternative assurance activities that compensate for the reduced level of assurance due to sample rates not being achieved;
        • required reporting relating to the outcome of quality assurance management was suspended between January and June 2019 while capability of the tool was enhanced. This significantly reduced oversight of activities being undertaken;
        • Home Affairs was not able to demonstrate sufficient reporting to either the Executive or Audit Committee to facilitate their assessment and action including independent advice and assurance by the Audit Committee regarding the appropriateness of the system of risk oversight and management and system of internal control; and
        • certain content in the existing framework document was out of date.

        5.8.27 The ANAO concluded that the audit finding did not impact the calculation and recognition of visa revenue in the financial statements. The significant non-adherence to the related requirements undermines:

        • the assurance that was being obtained by management over key controls and the appropriateness of decisions, and the adequacy and validity of reports to the executive for strategic policy decisions;
        • effective risk and resource management, including informed identification, and adjustment to risk mitigation activities; and
        • opportunities for improvement and staff training requirements.

        5.8.28 During 2019–20, Home Affairs progressed drafting of revised assurance framework documents and has commenced stakeholder consultation; implemented an assurance activity procedural instruction; commenced the development of program Quality Management Plans; significantly enhanced the compliance rate by location of required sample rates; implemented reporting and monitoring activities; completed system enhancements; commenced the development of processes to be applied where control frameworks were ineffective and commenced a process to leverage results to inform decision making.

        5.8.29 While redeploying resources to COVID-19 critical areas, Home Affairs has made significant progress in addressing recommendations during 2019–20. The ANAO will continue to assess progress made by Home Affairs during the 2020–21 audit.

        Australian Federal Police

        5.8.30 The Australian Federal Police (AFP) is responsible for the provision of police services in relation to laws of the Commonwealth, the provision of policing services to the Australian Capital Territory and external territories, combatting transnational serious organised crime and terrorism, disrupting crime offshore, supporting regional security, and protecting Australian interests and assets.

        5.8.31 Consistent with the Australian Government’s response to the COVID-19 pandemic, the AFP implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include:

        • management of airport and cruise ship arrivals and quarantine of Australians returning from overseas;
        • focus on innovative disruption techniques to combat emerging fraud relating to COVID-19 stimulus response packages;
        • deploying members to the Northern Territory Police Force to help protect remote and vulnerable Indigenous communities;
        • maintaining a physical presence at Centrelink offices (at the request of Services Australia) and at shopping centres and supermarkets;
        • increased patrols to ensure that citizens adhered to social distancing measures and were complying with lawful public health orders and government instructions; and
        • supported enforcement of state border checks when requested.

        5.8.32 In delivering these measures, the AFP did make significant changes to internal controls or key governance arrangements.

        Summary of financial performance

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

        Table 5.8.6: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (1,264.8)

        (1,216.8)

        Revenue from government

        1,128.3

        1,103.3

        Surplus/(deficit) attributable to the Australian Government

        (136.5)

        (113.5)

        Total other comprehensive income

        22.9

        Total comprehensive income/(loss) attributable to the Australian Government

        (113.6)

        (113.5)

        Total assets

        2,055.2

        976.7

        Total liabilities

        1,602.5

        560.7

        Total equity

        452.7

        416.0

           

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

        5.8.34 The increase in revenue from government is mainly due to new funding for national security measures.

        5.8.35 The movement in asset and liabilities is primarily due to the recognition of $1.0 billion of right-of-use assets and $1.0 billion of leases liabilities associated with AASB 16.

        Table 5.8.7: Key administered financial statements items

        Key administered financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        8.1

        14.5

        Total income

        0.9

        0.5

        Surplus/(deficit) after income tax

        (7.2)

        (14.0)

        Total other comprehensive income after income tax

        Total comprehensive income/(loss)

        (7.2)

        (14.0)

        Total assets administered on behalf of Government

        0.1

        0.1

        Total liabilities administered on behalf of Government

        1.0

        1.1

        Net assets/(liabilities)

        (0.9)

        (1.1)

           

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

        5.8.36 Decrease in total administered expenses due to a $2.4 million decrease in general office expenses as a result of low value radio communication equipment purchases associated with the Papua New Guinea (PNG) Asia-Pacific Economic Cooperation (APEC) program in 2018–19 and a $3.5 million decrease in training expenses as a result of the PNG controlled outcome training program and the fire and rescue Solomon Islands Police Development Program not being run in 2019–20.

        Key areas of financial statements risk

        5.8.37 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 AFP’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 5.8.8.

        Table 5.8.8: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        employee benefits

        $943.7 million

        employee provisions

        $417.2 million

        Recognition and measurement of payroll.

        Moderate

        • size and complex nature of the payroll function. Payroll expenses include a large number of sworn personnel, variable and extended work hours (i.e. penalty rates) and a wide variety of allowances; and
        • the identification of an underpayment of superannuation on certain allowances.

        All financial statement line items

        Operating effectiveness of IT general controls (ITGCs).

        Moderate

        • unresolved audit findings from prior years.
            

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

        Audit results

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

        Table 5.8.9: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        2

        (2)a

        Total

        2

        (2)

             

        Note a: The moderate audit finding relating to the underpayment of superannuation on certain allowances was downgraded to a minor audit finding.

        Source: ANAO 2019–20 audit results

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

        Resolved moderate audit findings

        Underpayment of superannuation on certain allowances

        5.8.40 During 2017–18, AFP identified an underpayment of superannuation expenses dating back to 2007, which resulted in the understatement of employee expenses and liabilities. The underpayment primarily related to obligations to pay superannuation on certain allowances which arose as a result of lack of clarity of obligations in enterprise agreements. An estimate of the resulting liability for specific allowances was reported in 2017–18 with an increase to the estimate reported in 2018–19 upon clarification of the liability for additional allowances.

        5.8.41 The AFP is continuing to progress the superannuation project. Whilst there is a sizable number of remaining reviews to be completed for impacted members to fully remediate the known underpayment of superannuation, the project is expected to be well advanced during 2020–21 to quantify the actual liability and commence settlement of these liabilities ahead of 30 June 2021. The ANAO will review the progress of this work as part of the 2020–21 financial statements audit.

        5.8.42 The ANAO identified that there remained issues relating to the underpayment of superannuation on certain allowances that AFP are continuing to address. As a result of the progress observed by the ANAO in relation to defining an appropriate provision and the program of work underway, this finding has been downgraded to a minor finding.

        FMIS user access provisioning and termination

        5.8.43 During 2016–17 it was identified that the AFP did not have adequate controls around the review of position based FMIS access, and had a significant number of users with access to sensitive transaction codes. This can lead to increased risk of improper use, or changes made to the system and master data. The ANAO recommended changes to limit access and reduce the risk where possible. If limiting access was not possible a formal risk assessment was to be undertaken with periodic reviews of access, and implementation of monitoring of users with this access performed. In response to this issue the AFP significantly reduced the number of users with sensitive access and was evaluating the need for additional compensating controls.

        5.8.44 AFP engaged an external consultant to assist in the preparation of a position paper, outlining the mitigating controls in place to address the risk that people are given incorrect access to the FMIS. This position paper was provided to ANAO on 11 August 2020. The paper lists compensating controls in place as part of standard business processes. The compensating controls in place are appropriate to mitigate a material misstatement in the financial statements.

        Australian Security Intelligence Organisation

        5.8.45 The Australian Security Intelligence Organisation (ASIO) is responsible for protecting Australia, its people and its interests from threats to security through intelligence collection, assessment and advice to the government.

        Summary of financial performance

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

        Table 5.8.10: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net cost of/(contribution by) services

        563.1

        553.7

        Revenue from government

        473.0

        435.2

        Surplus/(deficit) attributable to the Australian Government

        (90.1)

        (118.5)

        Total other comprehensive income/(loss)

        20.5

        Total comprehensive income/(loss) attributable to the Australian Government

        (69.6)

        (118.5)

        Total assets

        1,113.0

        477.0

        Total liabilities

        744.7

        134.1

        Total equity

        368.3

        342.9

           

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

        5.8.47 The increase in net cost of services is due to a $15.0 million increase in employee benefits expenses as a result of increasing the total number of employees to meet operation needs. The increase in revenue from government relates to a number of budget measures that increased the total resourcing available to ASIO.

        5.8.48 Assets increased as a result of $79.0 million investment in property, plant and equipment to support operations; a $24.4 million increase in trade and other receivables reflecting undrawn appropriations, largely as a result of delays in capital projects due to COVID-19 and the recognition of $605.8 million right-of-use in accordance with AASB 16.

        5.8.49 The increase in liabilities for the period mainly relates the recognition of lease liabilities of $618.5 million in accordance with AASB 16.

        Key areas of financial statements risk

        5.8.50 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 ASIO’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 5.8.11. No significant or moderate audit findings were identified relating to the key areas of risk.

        Table 5.8.11: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Employee benefits expenditure

        $287.1 million

        employee leave provisions

        $96.5 million

        Accuracy and completeness of employee benefits

        Moderate

        • limitations in the payroll system mean that some entitlements require manual calculation.
            

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

        Audit results

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

        5.9 Industry, Science, Energy and Resources portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Industry, Science, Energy and Resources

        Yes

        Moderate

        31 Aug 20

        31 Aug 20

        Nil

        Australian Nuclear Science and Technology Organisation

        Yes

        Moderate

        E

        13 Oct 20

        13 Oct 20

        Australian Nuclear Science and Technology Organisation Nuclear Medicine Pty Ltd

        Yes

        Moderate

        E

        4 Nov 20

        5 Nov 20

        Nil

        Clean Energy Finance Corporation

        Yes

        Moderate

        20 Aug 20

        20 Aug 20

        Nil

        Clean Energy Regulator

        No

        Moderate

        25 Sept 20

        25 Sept 20

        Commonwealth Scientific and Industrial Research Organisation

        Yes

        Moderate

        07 Sept 20

        07 Sept 20

        Nil

        Geoscience Australia

        Yes

        Low

        04 Sept 20

        05 Sept 20

        Nil

        Snowy Hydro Limited

        Yes

        Moderate

        31 Aug 20

        31 Aug 20

        Nil

               

        Portfolio overview

        5.9.1 The Industry, Science, Energy and Resources portfolio is responsible for supporting science and its commercialisation; growing business investment and improving business capability; developing Northern Australia; streamlining regulation; developing and implementing a national response to climate change; improving Australia’s energy supply, efficiency, quality, performance and productivity; and facilitating the growth of small and family business.

        5.9.2 The Department of Industry, Science, Energy and Resources (Industry) is responsible for supporting science and its commercialisation; growing business investment and improving business capability; developing Northern Australia; streamlining regulation; developing and implementing a national response to climate change; improving Australia’s energy supply, efficiency, quality, performance and productivity; and facilitating the growth of small and family business.

        5.9.3 Figure 5.9.1 shows the Industry, Science, Energy and Resources Portfolio’s income, expenses, assets and liabilities.

        Figure 5.9.1: Industry, Science, Energy and Resources portfolio’s income, expenses, assets and liabilities

        Figure 5.9.1 shows Industry, Science, Energy and Resources portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.9.4 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 Industry, Science, Energy and Resources portfolio.

        Table 5.9.1: The number of audit differences for entities in the Industry portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Industry, Science, Energy and Resources

        3

        3

        3

        3

        6

        Australian Nuclear Science and Technology Organisation

        3

        6

        9

        – ANSTO Nuclear Medicine Pty Ltd

        3

        3

        3

        3

        Clean Energy Finance Corporation

        4

        4

        2

        2

        Commonwealth Scientific and Industrial Research Organisation

        1

        1

        – National ICT Australia Limited

        1

        1

        2

        2

        – Science and Industry Endowment Fund

        1

        1

        Clean Energy Regulator

        1

        1

        1

        1

        Climate Change Authority

        1

        1

        IP Australia

        1

        1

        National Offshore Petroleum Safety and Environmental Management Authority

        3

        3

        2

        2

               

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

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

        Department of Industry, Science, Energy and Resources

        5.9.6 The Department of Industry, Science, Energy and Resources (Industry) is responsible for supporting science and its commercialisation; growing business investment and improving business capability; developing northern Australia; streamlining regulation; developing and implementing a national response to climate change; improving Australia’s energy supply, efficiency, quality, performance and productivity; and facilitating the growth of small and family business.

        5.9.7 As a result of the Administrative Arrangement Order (AAO) effective 1 February 2020, the Department of Industry, Science, Energy and Resources was created from a merger of the Department of Industry, Innovation and Science; the energy and climate change functions (excluding climate science and adaptation) from the Department of the Environment and Energy; and small business functions from the Department of Employment, Skills, Small and Family Business. The new department continues to operate a grants hub and shared service centre, which provides other Commonwealth entities with administrative support, including grants administration and payments processing; human resources and financial transactions processing; and the management information systems to support these processes.

        5.9.8 Consistent with the Australian Government’s response to the COVID-19 pandemic, Industry has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include supporting access to personal protective and medical equipment, helping to ensure ongoing access to secure energy supplies, and addressing impediments in critical supply chains.

        5.9.9 In delivering these measures, Industry did not make significant changes to internal controls or key governance arrangements.

        Summary of financial performance

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

        Table 5.9.2: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (519.7)

        (423.4)

        Revenue from government

        474.0

        397.8

        Surplus/(deficit) attributable to the Australian Government

        (45.7)

        (25.6)

        Total other comprehensive income

        8.6

        0.7

        Total comprehensive income/(loss) attributable to the Australian Government

        (37.1)

        (24.9)

        Total assets

        706.9

        348.3

        Total liabilities

        504.8

        165.7

        Total equity

        202.1

        182.6

           

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

        5.9.11 Net cost of services increased due to an increase in employee benefits of $61.0 million and supplier expenses of $13.7 million as a result of the AAO; and an increase in depreciation and amortisation expenses of $33.2 million following implementation of AASB 16. The increase in net costs of services was slightly off-set by increases in revenue as a result of the AAO by $8.0 million and revenue generated from the shared services centre by $13.0 million. Revenue from government increased by $76.2 million due to the gain of functions as a result of the AAO.

        5.9.12 Total assets increases due to an increase of $318.1 million land and buildings a result of the implementation of AASB 16, increase in cash of $20.6 million mainly due to the increased appropriation due to the AAO, increase in receivables of $25.1 million due to increased National Measurement Institute analytical testing.

        5.9.13 The increase in liabilities is primarily due to the application of AASB 16 and the associated recognition of lease liabilities of $316.7 million.

        Table 5.9.3: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        1,923.3

        1,704.2

        Total income

        1,604.7

        1,489.1

        Surplus/(deficit)

        (318.6)

        (215.1)

        Total other comprehensive income (loss)

        (219.2)

        (204.1)

        Total comprehensive income/(loss)

        (537.8)

        (419.2)

        Total assets administered on behalf of Government

        25,246.9

        3,650.6

        Total liabilities administered on behalf of Government

        226.5

        103.3

        Net assets/(liabilities)

        25,020.4

        3,547.3

           

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

        5.9.14 Total expenses largely increased as a result of the AAO, increase in supplier expenses of $47.4 million, increase in payments to corporate Commonwealth of $154.4 million and an increase in finance costs of $71.1 million as a result of four new concessional loans from the Northern Australia Infrastructure Facility. This was slightly offset by a decrease in grant expenditure of $61.8 million due to less demand and a reduction in milestone achievements attributed to the effects of COVID-19 pandemic.

        5.9.15 Total income increased as a result of the AAO with the recognition of dividends from Snowy Hydro Limited of $109.3 million. In addition, in preparation for closure of the Ranger Uranium Mine during the year ending 30 June 2021 Industry brought to account security funds for the rehabilitation of the Ranger Uranium Mine increasing income by $454.0 million. This was partially offset by a reduction in Royalty revenue of $434.7 million as a result of lower petroleum commodity prices due to global price volatility attributable to the COVID-19 pandemic.

        5.9.16 As a result of the AAO, assets increased by $21.6 billion. Cash assets increased by $5.9 billion with the inclusion of the Clean Energy Finance Corporation Special Account and Ranger Rehabilitation Special Account, while Investments increased by $15.6 billion with the inclusion of Snowy Hydro Limited, the Clean Energy Finance Corporation and the Australian Renewable Energy Agency.

        5.9.17 Liabilities increased by $123.2 million predominately as a result of the new Fuel Security Program purchase of crude oil reserves valued at $86.4 million, an increase in supplier payables of $22.4 million as a result of the AAO, and increase in loan commitments of $56.5 million as a result of four new concessional loans from the Northern Australia Infrastructure Facility. This increase in liabilities was off-set by a reduction in grants payable of $32.7 million due to less demand and a reduction in milestone achievements attributed to the effects of COVID-19 pandemic.

        Key areas of financial statements risk

        5.9.18 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 Industry’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 5.9.4, 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 5.9.4: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        royalties revenue

        $969.8 million

        accrued revenue

         

        Completeness and accuracy of offshore petroleum and uranium royalties

        KAM

        Higher

        • reliance on data reporting and administrative functions performed by third parties, including state and foreign governments and other federal government agencies; and
        • calculations are dependent on information provided by taxpayers in a self-assessment regime.

        Departmental

        own-source income

        $104.9 million

        Completeness and accuracy of Industry’s other revenue streams

        Higher

        • diversity of revenue streams;
        • reliance on manual calculations to quantify some revenue amounts; and
        • cash based transactions.

        Administered

        other investments

        $18.9 billion

        Valuation of the Australian Government’s investment in Snowy Hydro Ltd

        KAM

        Higher

        • a unique asset that is not readily traded in the open market, subject to complex estimation and significant judgement relating to forecasts of future cash flows.

        Administered

        loans (a component of trade and other receivables

        $130.5 million)

        Valuation of concessional loans made under the Northern Australia Infrastructure Facility program

        Moderate

        • subject to significant judgement relating to the determination of the market interest rate and loan terms for use in the valuation; and
        • complexity and variety of concessions that are able to be provided increases the risk of determining an inaccurate value.

        Administered

        Grants expense

        $340.5 million

        Grants payable

        $32.1 million

        Accuracy, occurrence and completeness of grant payments

        Moderate

        • significant number of individual grant programs which operate under separate grant agreements and are subject to different eligibility criteria; and
        • reliance on third party acquittals to confirm validity of grant payments.
            

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

        Audit results

        5.9.19 There were no significant or moderate unresolved audit findings at the conclusion of the 2019–20 financial statements audit.

        Australian Nuclear Science and Technology Organisation

        5.9.20 The Australian Nuclear Science and Technology Organisation (ANSTO) is Australia’s national nuclear research and development organisation. ANSTO operates Australia’s only nuclear research reactor and the Australian Synchrotron, contributes to radiopharmaceutical production and supply, and conducts research into areas of national priority, including human health, the environment and the nuclear fuel cycle. ANSTO also provides advice to government and other stakeholders on matters relating to nuclear science, technology and engineering.

        Summary of financial performance

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

        Table 5.9.5: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (157.5)

        (698.0)

        Revenue from Government

        281.9

        214.2

        Income tax benefit/(expense)

        (0.2)

        (0.1)

        Surplus/(deficit) attributable to the Government

        124.5

        (484.0)

        Total other comprehensive income/(loss)

        (2.7)

        (53.8)

        Total comprehensive income/(loss) attributable to the Australian Government

        121.6

        (537.9)

        Total assets

        1,473.7

        1,397.1

        Total liabilities

        900.2

        1,026.4

        Total equity

        573.4

        370.7

           

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

        5.9.22 Net cost of services decreased as a result of the $114.6 million decrease in impairment expenses compared to 2018–19 when the ANM Mo-99 production facility was impaired and a $301.6 million decrease in the decommissioning expense, with a gain of $146.1 million being recognised in 2019–20. This was slightly offset by a $36.7 million decrease in the sale of goods and rendering of services.

        5.9.23 Revenue from government increased by $67.8 million mainly relating to the Strengthening the Australian Nuclear Science and Technology Organisation measure.

        5.9.24 Liabilities have decreased primarily as a result of the rephasing of planned decommissioning works to align with expected funding with the impact of reducing the decommissioning provision.

        Key areas of financial statements risk

        5.9.25 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 ANSTO’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 5.9.6.

        Table 5.9.6: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Decommissioning provision

        $745.4 million

        Valuation of the decommissioning provision including radioactive waste

        Moderate

        • complexity of the calculation and reliance upon the exercise of significant judgement relating to the decommission of unique assets and materials.

        Property, plant and equipment

        $1,121.4 million

        intangible assets

        $54.8 million

        Parent entity disclosures -Investment in subsidiaries

        Valuation and subsequent depreciation of non-financial assets

        Moderate

        • the valuation of non-financial assets is subjective and requires significant judgement particularly given the unique nature of assets held; and
        • the Mo-99 facility was expected to be operational during 2018–19 with the assets no longer being accounted for as assets-under-construction.

        Financial statement disclosures

        Cash flow and going concern

        Moderate

        • cash flow issues were identified in the ANSTO Nuclear Medicine subsidiary casting doubt on the ability of this entity to continue as a going concern with reliance on ANSTO to provide financial support.

        Total own-source revenue

        $87.0 million

        Completeness and accuracy of material streams of commercial revenue

        Moderate

        • the number of revenue streams from both commercial and government sources and complexity of funding arrangements; and
        • first time adoption of AASB 15 Revenue from contracts with customers for ANSTO’s subsidiaries.
            

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

        Audit results

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

        Table 5.9.7: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        1

        Total

        1

        1

             

        Source: ANAO 2019–20 audit results

        Unsolved moderate audit findings

        Financial statement process and position papers preparation process

        5.9.27 As part of the year-end 2017–18 financial statements process it was agreed with ANSTO management that improvements were required through enhancing the financial statements preparation process and the preparation of accounting position papers for key accounting and disclosure issues. This was to be implemented as part of the 2018–19 financial statements preparation process. While progress was made by management in 2018–19 and 2019–20, there continued to be significant audit differences particularly in relation to the measurement of ANSTO’s decommissioning provisions. Accounting position papers from management did not always appropriately support assumptions used for significant areas of estimation and judgement, and accounting position papers were not provided to audit committee or the ANAO in a timely manner. As a result the finding remains unresolved and will be reviewed as part of the 2020–21 financial statements audit.

        Emphasis of Matter

        5.9.28 In the calculation of the decommissioning provision as at 30 June 2019, and previous years, cash flows were discounted using a rate that was identified as an error in accordance with AASB 108 Accounting Policies, Changes in accounting estimates and errors. ANSTO restated the prior year comparatives in the 2019–20 financial statements and provided appropriate disclosures. As a result, the 2019–20 auditor’s report contains an Emphasis of Matter drawing attention to the disclosure within the financial statements which describes the error in the calculation of the amounts reported for the decommissioning provision.

        Australian Nuclear Science and Technology Organisation Nuclear Medicine Pty Ltd

        5.9.29 ANSTO Nuclear Medicine Pty Ltd (ANM) is a wholly owned subsidiary of the Australian Nuclear Science and Technology Organisation (ANSTO). ANM was established to own and operate the new Molybdenum 99 (Mo-99) production facility at ANSTO’s campus.

        Emphasis of matter

        5.9.30 The auditor’s report for ANM’s financial statements included an emphasis of matter paragraph to draw attention to the notes of the financial statements which indicates that a material uncertainty exists that may cast significant doubt on ANM’s ability to continue as a going concern.

        Clean Energy Finance Corporation

        5.9.31 The Clean Energy Finance Corporation (CEFC) is a corporate Commonwealth entity established under the Clean Energy Finance Corporation Act 2012. The CEFC is responsible for the facilitation of increased flows of finance into the clean energy sector. The CEFC’s role is to invest with commercial rigour in a diverse portfolio across the spectrum of clean energy technologies, that are solely or mainly Australian based - either directly or indirectly through industry and the banking sector that, in aggregate, have an acceptable but not excessive level of risk relative to the sector.

        5.9.32 The CEFC seeks to mobilise capital investment in renewable energy, low-emissions technology and energy efficiency in Australia through commercial loans, concessional loans, equity investments and loan guarantees.

        5.9.33 The CEFC is required to liaise with relevant persons and bodies, including the Australian Renewable Energy Agency, the Clean Energy Regulator, other Australian Government entities and state and territory governments, for the purposes of facilitating its investment function. In the Investment Mandate Direction 2020, the responsible ministers have also strongly encouraged the CEFC Board to prioritise investments that support reliability and security of electricity supply and make available from its original $10 billion of funding, up to:

        • $1 billion of investment finance over 10 years for the Reef Funding Program;
        • $1 billion of investment finance over 10 years for a Sustainable Cities Investment Program;
        • $200 million for debt and equity investment through the Clean Energy Innovation Fund;
        • $100 million for an Australian Recycling Investment Fund; and
        • $300 million in concessional finance through the Advancing Hydrogen Fund.
        Summary of financial performance

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

        Table 5.9.8: Key financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        149.6

        216.8

        Revenue from government

        1.9

        Surplus/(deficit) attributable to the Australian Government

        153.8

        218.8

        Total other comprehensive income

        (7.0)

        (0.1)

        Total comprehensive income/(loss) attributable to the Australian Government

        146.8

        218.7

        Total assets

        5,291.6

        4,891.4

        Total liabilities

        64.7

        71.3

        Total equity

        5,226.9

        4,820.1

           

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

        5.9.35 The decrease in the net contribution by services is due to the increase in the impairment provision on loans and receivables primarily as a result of changes in industry specific factors including the impact of lower electricity prices on electricity related investments and the COVID-19 pandemic on property investments.

        5.9.36 Total assets increased as a result of the increase in cash and cash equivalent of $497.4 million as CEFC was unable to deploy all investments which were forecast mainly due to the Covid-19 pandemic.

        Key areas of financial statements risk

        5.9.37 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 CEFC‘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 5.9.9. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.9.9: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Revenue from interest and loan fees and distributions from trusts and equity investments

        $204.9 million

        Revenue recognition

        Higher

        • calculation of revenue from a diverse set of financial assets, some of which are complex in nature and some of which are concessional; and
        • amounts received for establishment and other fees may be in a form other that cash (for example, shares), raising valuation issues.

        Loans and advances

        $2.3 billion

        Other debt securities

        $1.4 billion

        Other financial assets

        $520.8 million

        Provision for concessional loans

        $4.1 million

        Accounting for complex finance agreements including the adequacy of impairment provisions and concessional loan adjustments

        Higher

        • complex lending scenarios to entities undertaking new or emerging technologies in the clean energy sector where a mature track record of results is still to be established and where access to other finance has been challenging;
        • complicated agreements with borrowers impacting on fair value assessment and concessional loan accounting calculations;
        • obtaining relevant benchmark information for related market data from which concessional loan charges are determined requires significant judgement; and
        • complexity of impairment assessments in relation to forecast future cash flows, security valuation and relevant discount factors, given the nature of the borrowers and their underlying business.

        Key management personnel remuneration

        $5.1 million

        Accuracy and completeness of the disclosure of key management personnel remuneration

        Moderate

        • a portion of the executive remuneration is based on achievement of KPIs, requiring verification of the KPIs and the variable remuneration paid.
        •  
            

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

        Audit results

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

        Commonwealth Scientific and Industrial Research Organisation

        5.9.39 The primary functions of the Commonwealth Scientific and Industrial Research Organisation (CSIRO), as set out in the Science and Industry Research Act 1949, are to carry out scientific research and facilitate the application or utilisation of the results of such research. CSIRO is responsible for delivering science and innovative solutions for industry, society and the environment.

        Summary of financial performance

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

        Table 5.9.10: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (797.1)

        (871.9)

        Revenue from government

        837.9

        834.6

        Surplus/(deficit)

        40.8

        (37.3)

        Total other comprehensive income

        (176)

        15.7

        Total comprehensive income/(loss)

        40.6

        (21.6)

        Total assets

        3,057.2

        2,853.5

        Total liabilities

        675.4

        554.3

        Total equity

        2,381.8

        2,299.2

           

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

        5.9.41 The decrease in the net cost of services is primarily related to the increase in gains of $109.6 million compared to the prior year as a result of the valuation of equity instruments increasing by $86.6 million.

        5.9.42 The movement in assets and liabilities is primarily due to the initial recognition of right-of-use assets of $191.3 million and lease liabilities of $116.7 million on implementation of AASB 16.

        Key areas of financial statements risk

        5.9.43 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 CSIRO‘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 5.9.11. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.9.11: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Revenue from contracts with customers – Rendering of Services

        $406.3 million

        Trade and Other Receivables – Contract Assets

        $31.9 million

        Suppliers – Contract Liabilities

        $160.8 million

        Completeness and accuracy of research project revenue and associated measurement of WIP and unearned revenue and Implementation of revenue in accordance with the amended account standard AASB 15 Revenue; and AASB 1058 Income from Not-for Profit Entities

         

        Moderate

        • revenue is recorded with reference to contracted milestones and the stage of completion;
        • the degree of judgement involved across a number of revenue from a variety of sources and funding models;
        • the degree of judgement involved across a number of revenue from a variety of sources and funding models; and
        • implementation of first time adoption of new accounting standards.

        Work in progress

        (a component of plant and equipment)

        $559.2 million

        Completeness and classification of ongoing asset capital projects

        Moderate

        • degree of judgement involved to ensure that relevant accounting standards are met and values do not exceed fair value; and
        • balance is susceptible to errors of judgement.

        Carrying amount of right-of-use assets – Land and buildings

        $189.2 million

        Lease liability

        $116.7 million

        Valuation and completeness of right-of-use assets and the associated liability due to the implementation of first time adoption of new accounting standard AASB 16

        Moderate

        • first time adoption of AASB 16; and
        • the completeness of management’s identification of leases and the selection of the appropriate accounting treatment under the transition provisions in AASB 16.

        Land and buildings

        $1,608.2 million

        Plant and equipment

        $559.2 million

        Investment properties

        $49.4 million

        Valuation of land and buildings, investment properties, and plant and equipment

        Moderate

        • the valuation requires significant judgement as investment properties and land and buildings can be specialised in nature with no readily available market reference points; and
        • balances are sensitive to movements in assumptions adopted in the underlying valuation models and are subject to possible impairment.

        Provision for remediation (Woomera site)

        $40.5 million

        Valuation of the provision for remediation

        Moderate

        • inherent uncertainty associated with remediation works to be undertaken on waste material located at a remote location; and
        • significant judgement required in the selection of the valuation model’s assumptions.

        Unlisted companies

        (a component of other investments)

        $291.4 million

        Valuation and disclosure of unlisted companies

         

        • the valuation requires significant judgement as these start-up entities are not publicly listed due to their diverse nature and being early stage development and funding arrangements.
            

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

        Audit results

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

        Geoscience Australia

        5.9.45 Geoscience Australia is Australia’s pre-eminent public sector geoscience organisation and the nation’s trusted advisor on the geology and geography of Australia. Geoscience Australia’s work covers the Australian continent, the Australian marine jurisdiction and responsible jurisdictions in Antarctica. Geoscience Australia applies geoscientific capabilities to the opportunities and challenges that face the nation, to inform and support government, industry, decision makers and the public.

        Summary of financial performance

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

        Table 5.9.12: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (181.5)

        (182.8)

        Revenue from government

        191.3

        184.4

        Surplus/(deficit) attributable to the Australian Government

        9.9

        1.6

        Total other comprehensive income

        2.4

        Total comprehensive income/(loss) attributable to the Australian Government

        12.3

        1.8

        Total assets

        507.4

        144.9

        Total liabilities

        395.9

        112.7

        Total equity

        111.6

        32.2

           

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

        5.9.47 Revenue from government increased as a result of a $6.9 million increase in government appropriations to support the continuation of the Exploring for the Future program, to map minerals, energy and groundwater potential in Northern Australia and South Australia, and Digital Earth Australia, which uses satellite spatial data to help detect physical changes across the environment.

        5.9.48 Total assets and liabilities increased mainly as result of recognising $323.6 million right-of-use asset and $329.0 million lease liabilities associated with the application of AASB 16.

        5.9.49 Total liabilities was slightly offset by a decrease in other payables of $15.7 million due to the de-recognition of the lease incentive straight-lining liability of $13.0 million, decrease in unearned revenue from Commonwealth and state government income of $1.5 million and decrease in staff redundancies payable of $0.9 million compared to the prior year.

        Key areas of financial statements risk

        5.9.50 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 Geoscience’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 5.9.9. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.9.13: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Heritage and cultural assets $3.2 million Plant and equipment $35.8 million

        Valuation of collections / plant and equipment

        Moderate

        • Valuation of non-financial assets requires judgement and accounting estimation;
        • Non-financial assets also includes positioning assets gifted from the Western Australian Government as part of the National Positioning Infrastructure project.

        Unearned income from contracts with customers $26.8 million

        Deferred revenue and related income

        Moderate

        • Recognition of revenue related to long-term contracts and the relevant deferred revenue balances at 30 June 2020 is a relatively complex process and requires judgement.
            

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

        Audit results

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

        Snowy Hydro Limited

        5.9.52 Snowy Hydro Limited (Snowy Hydro) is a government business enterprise whose primary business includes energy generation activities to supply the National Electricity Market and operating as a retail energy provider to over one million customers through the Red Energy and Lumo Energy brands. Snowy Hydro’s energy generation capacity of 5,500 megawatts supplies New South Wales, Victoria and South Australia, primarily through the generating capacity of the Snowy Mountains hydroelectric scheme. Snowy Hydro is currently progressing Snowy 2.0, a pumped hydro project that will add 2,000 megawatts of on-demand generation and approximately 350,000 megawatt hours of large-scale storage to the National Energy Market.

        Summary of financial performance

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

        Table 5.9.14: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total revenue

        2,710.3

        2,869.5

        Total expenses

        2,594.3

        2,393.5

        Income tax expense

        34.8

        143.8

        Profit for the period

        81.2

        332.2

        Other comprehensive income

        (140.3)

        (85.6)

        Total other comprehensive income attributable to the Australian Government

        (59.1)

        246.6

        Total assets

        4,912.9

        4,119.3

        Total liabilities

        3,162.9

        2,092.4

        Total equity

        1,750.0

        2,026.9

           

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

        5.9.54 Total revenue decreased due to a $123.9 million decrease in generation revenue for the period, reflecting the drier conditions and forecast in the Snowy Mountains which decreased water flow and electricity generation and decreased electricity spot prices in the national electricity market in the second half of the financial year, partially offset by an $58.3 million increase in retail electricity and gas revenue from Red and Lumo Energy due to an increase in the total number of customers contracted for utility supply and an increase in customer pricing.

        5.9.55 Total profit decreased due to a $204.4 million change in the value of financial instruments reflecting changes in the key valuation inputs into valuation models, including future electricity spot prices and the impact of decreased revenue as outlined above.

        5.9.56 Total other comprehensive income decreased due to the impact of market changes on exchange and interest rate hedges recorded through other comprehensive income. As the hedges were placed against future rate increases, which did not eventuate due to the impact of the COVID-19 pandemic on the market these hedges are recorded in a liability position at 30 June 2020.

        5.9.57 The increase in assets is due mainly to further construction activity for Snowy 2.0 during the period with a total of $386.3 million in project costs capitalised and $22.5 million in borrowing costs capitalised. This expenditure also impacted the balance of GST receivable and deferred tax assets, which increased commensurate with the increased expenditure on construction activity that is partially recoverable for tax purposes in future reporting periods.

        5.9.58 The increase in liabilities is primarily due to the drawdown of the $587.1 million loan facilities to fund construction of Snowy 2.0; and a $204.4 million change in the value of financial instruments. The increase in liability position for financial instruments reflects the impact of changes in key inputs in the valuation model for these derivative contracts, particularly the decreased electricity prices expected to be received by Snowy Hydro under future contracts, based on estimated future electricity spot prices, and due to the impact of COVID-19 pandemic on financial markets which decreased interest rates and exchange rates at 30 June 2020.

        Key areas of financial statements risk

        5.9.59 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 Snowy Hydro’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 5.9.15. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.9.15: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Other Financial Assets

        $266.1 million

        Other Financial Liabilities

        $781.1 million

        Decrease in the fair value of financial instruments

        $204.4 million

        Decrease in other comprehensive income

        $201.3 million

        Valuation of financial instruments

        Higher

        • increased level of management judgement required to determine fair value of derivative contracts which are underpinned by complex data models to calculate financial instrument values;
        • valuation process requires the use of observable and unobservable inputs to calculate fair value. The nature and uniqueness of some energy market derivatives recognised by Snowy Hydro requires an increased level of judgement to determine unobservable valuation model inputs; and
        • the valuation of financial instruments is sensitive to inputs such as electricity prices, electricity supply volumes and market data such as interest and exchange rates. Some of the inputs were impacted by the economic effects of the COVID-19 pandemic.

        Environmental certificate assets

        $70.5 million

        Valuation of renewable energy certificates

        Higher

        • increased level of judgement applied by Snowy Hydro in determining the appropriate accounting treatment for renewable energy certificates and their valuation at balance date.

        Trade receivables

        $433.5 million (includes unbilled receivable of $247.0 million)

        Allowance for doubtful debts

        $40.4 million

        Completeness and accuracy of the impairment of retail debtors

        Higher

        • level of judgement applied by management in determining the estimate of expected life time credit loss on trade and other receivables. Management was required to consider the economic impact of events such as natural disasters and the COVID-19 pandemic in making these judgements which increased estimation uncertainty.

        Capitalised customer acquisition costs

        $110.2 million

        Amortisation

        $40.8 million

        Valuation of customer acquisition costs

        Higher

        • level of management judgement applied in determining which costs outlaid to acquire retail customers meet relevant technical requirements for capitalisation; and
        • complexity of estimation process and judgement applied to determine an appropriate amortisation rate reflective of the expected time a customer will continue to procure services from Snowy Hydro.

        Unbilled revenue receivable

        $247.0 million

        Valuation and existence of unbilled retail revenue

        Higher

        • estimation required due to services provided not yet billed arising from timing of electricity meter reads for customers and the date of preparing the financial statements; and
        • estimation process involves increased management judgement underpinned by a complex data model with a number of inputs, significant number of customers and data sources.

        Part of balance of construction in progress

        $1.1 billion

        Capitalisation of work in progress for Snowy 2.0

        Moderate

        • Snowy 2.0 is a complex infrastructure project delivered over a number of financial periods; and
        • judgement applied by Snowy Hydro in determining which costs associated with project establishment and delivery, meet the relevant technical requirements for capitalisation.

        Intangible Assets - Goodwill

        $383.2 million

        Valuation and impairment of non-financial assets

        Moderate

        • the impairment estimation process is complex and judgemental due to the nature of the impairment model which requires assumptions to be made related to future cash flows and discount rates.
            

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

        Audit results

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

        Comments on non-material entities

        Clean Energy Regulator

        5.9.61 The Clean Energy Regulator (CER) is responsible for administering schemes legislated by the Australian Government for measuring, managing, reducing or offsetting Australia’s carbon emissions.

        Resolved moderate audit finding

        Privileged user management

        5.9.62 In 2015–16, the ANAO raised three low risk findings relating to the logging and monitoring of privileged user activity at the application and database level across the environment. During the 2017–18 audit, CER advised that there were delays in the implementation of a comprehensive monitoring solution (SPLUNK). As a result, the findings remained open until the solution could be tested during the 2018–19 interim audit.

        5.9.63 During the 2018–19 interim audit the ANAO was unable to obtain evidence of full implementation of the SPLUNK solution; as a result the three low risk prior year findings were merged and a new moderate finding was raised due to the following:

        • the historical logging solution fell into an unrecoverable state in December 2018 and logs obtained from the system since that time were ad-hoc and unreliable due to collection errors;
        • logs being collected by the new SPLUNK solution were unavailable for review until May 2019, compounded by a lack of corporate knowledge in the use of the system due to staff absences; and
        • logs were only reviewed from 23 May 2019 onwards, with retrospective fixes applied in several incidents found through the logging process during the period.

        5.9.64 Based on the above, the underlying risks remained in effect for a substantial portion of the financial year (December 2018 to May 2019), noting also that the pre-December 2018 period was operating on the monitoring platform previously found to have weaknesses in the 2017–18 audit.

        5.9.65 The ANAO noted in 2018–19 that significant progress was made by the CER in addressing these issues, including the implementation of new logging and monitoring solutions, processes and procedures. The risk of material misstatement was mitigated through the retrospective review of logs performed by CER in May 2019. However, as these controls were not embedded for a sufficient period to demonstrate ongoing operating effectiveness during the 2018–19 audit cycle, the ANAO required confirmation that the remaining risks were addressed during testing in 2019–20.

        5.9.66 In 2019–20, the ANAO performed a follow up of this finding. Based on testing performed at final, sufficient evidence of the operating effectiveness of the monitoring processes was obtained to verify that previous issues were resolved and hence the finding was closed.

        5.10 Infrastructure, Transport, Regional Development and Communications portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of Infrastructure, Transport, Regional Development and Communications

        Yes

        Moderate

        2 Oct 20

        2 Oct 20

        Airservices Australia

        Yes

        Moderate

        16 Sept 20

        18 Sept 20

        Nil

        Australian Broadcasting Corporation

        Yes

        Moderate

        25 Aug 20

        25 Aug 20

        Australian Communications and Media Authority

        Yes

        Low

        3 Sept 20

        4 Sept 20

        Nil

        Australian Postal Corporation

        Yes

        Moderate

        20 Aug 20

        20 Aug 20

        Nil

        Australian Rail Track Corporation

        Yes

        High

        15 Oct 20

        15 Oct 20

        Nil

        Moorebank Intermodal Company Limited

        Yes

        High

        17 Sept 20

        18 Sept 20

        National Capital Authority

        Yes

        Low

        31 Aug 20

        1 Sept 20

        Nil

        National Gallery of Australia

        Yes

        Moderate

        24 Aug 20

        25 Aug 20

        Nil

        National Library of Australia

        Yes

        Low

        14 Aug 20

        17 Aug 20

        Nil

        NBN Co Limited

        Yes

        High

        6 Aug 20

        6 Aug 20

        Nil

        WSA Co Ltd

        Yes

        Moderate

        v

        24 Aug 20

        24 Aug 20

        Nil

               

        Portfolio overview

        5.10.1 The Department of Infrastructure, Transport, Regional Development and Communications is the lead entity in the portfolio and supports the Australian Government’s policies on infrastructure investments, regions and connecting Australians, and also supports an environment in which all Australians can access and benefit from communication services, creative experiences and culture.

        5.10.2 The department was renamed by the Administrative Arrangements Order of 5 December 2019, with effect from 1 February 2020. The department combines the functions of the previous Department of Communications and the Arts and the previous Department of Infrastructure, Transport, Cities and Regional Development.

        5.10.3 Figure 5.10.1 shows the Infrastructure, Transport, Regional Development and Communications portfolio income, expenses, assets and liabilities.

        Figure 5.10.1: Infrastructure, Transport, Regional Development and Communications portfolio’s income, expenses, assets and liabilities

        Figure 5.10.1 shows the Infrastructure, Transport, Regional Development and Communications portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.10.4 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 Infrastructure portfolio.

        Table 5.10.1: The number of audit differences for entities in the Infrastructure portfolio

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Infrastructure Transport, Regional Development and Communicationsa

        4

        2

        6

        Airservices Australia

        1

        1

        Australian Broadcasting Corporation

        5

        5

        1

        1

        Australia Business Arts Foundation

        3

        3

        1

        1

        Australian Communications and Media Authority

        1

        1

        1

        4

        5

        Australian Film and Television Radio School

        1

        1

        2

        2

        Australian Maritime Safety Authority

        1

        1

        1

        2

        3

        Australian Postal Corporation

        1

        1

        Australian Rail Track Corporation

        1

        2

        3

        5

        5

        Australian Transport Safety Bureau

        3

        3

        3

        3

        Bundanon Trust

        2

        4

        6

        1

        1

        Civil Aviation Safety Authority

        1

        1

        Moorebank Intermodal Company Limited

        2

        2

        4

        2

        3

        5

        National Capital Authority

        1

        1

        1

        2

        3

        National Film and Sound Archive

        1

        2

        3

        2

        1

        3

        National Library of Australia

        1

        1

        2

        2

        National Museum of Australia

        1

        1

        1

        1

        National Portrait Gallery of Australia

        1

        1

        2

        2

        National Transport Commission

        1

        1

        2

        3

        3

        NBN Co Limited

        1

        1

        Special Broadcasting Service Corporation

        1

        1

        WSA Co Ltd

        2

        2

        2

        2

               

        Note a: The 2018–19 adjusted and unadjusted audit differences comprises the total reported audit differences for the former Department of Infrastructure, Transport, Cities and Regional Development and the former Department of Communications and the Arts.

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

        5.10.5 The following sections provide a summary of the 2019–20 financial statements audit results for the Department of Infrastructure, Transport, Regional Development and Communications and other material entities.

        Department of Infrastructure, Transport, Regional Development and Communications

        5.10.6 The Department of Infrastructure, Transport, Regional Development and Communications (Infrastructure) is responsible for improving infrastructure across Australia through funding coordination of transport and other infrastructure; providing an efficient, sustainable, competitive and safe transport system for all transport users; strengthening the sustainability, capacity and diversity of regional economies; providing advice on population policy; implementing the national policy on cities; promoting an innovative and competitive communications sector; participation in and access to Australia’s arts and culture through developing and supporting cultural expression; and supporting governance arrangements in the Australian territories.

        5.10.7 Consistent with the Australian Government’s response to the COVID-19 pandemic, Infrastructure has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include:

        • coordinated the administration of the Australian Governments $1.0 billion ‘Relief and Recovery’ fund which was established for the purpose to provide rapid relief to the regions, communities and industry sectors most affected by the pandemic (across a number of areas);
        • as part of the $1.0 billion ‘Relief and Recovery’ fund, support for the aviation sector mainly through provision of cash subsidies, including for the purposes of keeping critical air routes open and to assist regional air service operators in maintaining financial viability ($298.0 million funding committed);
        • as part of the $1.0 billion ‘Relief and Recovery’ fund, support to the creative arts sector mainly through provision of grant funding to assist regional and indigenous artists to develop new work and to support artists crew and music workers ($27.0 million funding committed);
        • supported the Australian Territories through the pandemic, through economic assistance in the form of grant funding for infrastructure projects and through increased health and specialist advise capacity.

        5.10.8 To deliver these measures, Infrastructure made changes to internal controls and key governance arrangements including:

        • implementing a temporary COVID-19 organisational structure which prioritised Infrastructure’s response to COVID-19 impacted industries, regions and communities and the delivery of stimulus and support measures, balanced against the need to continue critical services and regulatory activities; and
        • following this prioritisation seconded 125 staff to Services Australia to assist with the delivery of the Australian Government’s emergency payments measures.
        Summary of financial performance

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

        5.10.10 A change to the Administrative Arrangements Orders, effective 1 February 2020, transferred all functions of the then Department of Communications and the Arts (Communications) to Infrastructure, and Communications was abolished. Infrastructure assumed responsibility for all outcomes and funding previously administered by Communications. As a result of this change, Infrastructure prepared financial statements in 2019–20 that encompassed the results of both Infrastructure and Communications as consolidated balances for the period 1 July 2019 to 30 June 2020.

        Table 5.10.2: Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19a

        Infrastructure ($m)

        2018–19a

        Communications ($m)

        Net (cost of)/ contribution by services

        (395.6)

        (225.7)

        (113.0)

        Revenue from government

        364.6

        210.0

        107.8

        Surplus/ (deficit) attributable to the Australian Government

        (31.0)

        (15.7)

        (5.2)

        Total other comprehensive income

        1.3

        0.1

        Total comprehensive loss attributable to the Australian Government

        (29.7)

        (15.6)

        (5.2)

        Total assets

        396.4

        177.2

        93.0

        Total liabilities

        246.0

        65.7

        39.7

        Total equity

        150.4

        111.5

        53.3

            

        Note a: The 2018–19 comparative figures displayed are for the former Department of Communications and the Arts and the Department of Infrastructure, Transport, Cities and Regional Development.

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

        5.10.11 The increase in the net cost of services and revenue from government is due to $12.0 million additional supplementation grants for the Arts portfolio entities and $34.2 million emergency drought funding for the Drought Community Support Initiative.

        5.10.12 The movement in assets and liabilities is primarily due to the increase of $132.3 million of right-of-use assets and $133.5 million of lease liabilities following the introduction of AASB 16. Fluctuations in other balances are considered to be a result of normal activities.

        Table 5.10.3: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19a

        Infrastructure ($m)

        2018–19a

        Communications ($m)

        Total expenses

        8,272.6

        4,760.5

        2,433.5

        Total income

        1,145.9

        563.5

        401.7

        Surplus/ (deficit)

        (7,127.7)

        (4,197.0)

        (2,031.8)

        Total other comprehensive income/ (loss)

        4,297.7

        (1,014.3)

        (4,833.0)

        Total comprehensive income/ (loss)

        (2,829.0)

        (5,211.3)

        (6,864.8)

        Total assets administered on behalf of Government

        54,343.2

        8,732.0

        34,978.0

        Total liabilities administered on behalf of Government

        541.4

        211.5

        355.3

        Net assets

        53,801.8

        8,520.5

        34,622.8

            

        Note a: The 2018–19 comparative figures displayed in this table is the consolidated result of the former Department of Communications and the Arts and the Department of Infrastructure, Transport, Cities and Regional Development.

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

        5.10.13 Total administered expenses increased mainly due to aviation subsidy payments of $608.6 million to support the aviation industry through the COVID-19 pandemic; and a $489.1 million increase in grants expenses mainly due to additional grant funding rounds as a result of announced budget measures, including for the ‘Roads to Recovery’ program.

        5.10.14 Total administered income increased mainly due to $277.2 million additional interest generated on loans and advances. Drawdowns were made from the Westconnex motorway and NBN Co Limited loan facilities, therefore increasing the principal on which interest is calculated. The increase was partially offset by a $70.6 million decrease in dividends received from corporate entities, such as Airservices Australia, in the Infrastructure portfolio due to the impact of the COVID-19 pandemic on trading conditions and profitability of these entities (from which dividends are declared).

        5.10.15 Total assets increased by $10.6 billion mainly due to an increases in advances and loans paid, particularly the significant NBN Co Limited loan facility where the NBN Co continued to access the loan during the period and drew an additional $6.4 billion in principal. In addition there was a $5.0 billion increase in the fair value of administered investments mainly as a result of:

        • a $5.1 billion increase in the value of NBN Co Limited with the change in valuation technique moving from the net assets method to the discounted cash flow model;
        • a $856.8 million decrease in the value of Airservices Australia and the Australian Rail Track Corporation given the impacts of the COVID-19 pandemic on its revenue sources, which are a primary input in the discounted cash flow valuation model; and
        • a $368.4 million increase in the value of the Australian Postal Corporation due to an increase in demand for parcel services due to the COVID-19 pandemic.

        5.10.16 The increase in liabilities reflects the $47.4 million increased expenses for subsidies payable as support measures for the aviation industry.

        Key areas of financial statements risk

        5.10.17 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 Infrastructure’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 5.10.4, including areas considered Key Audit Matters (KAM) by the ANAO.

        Table 5.10.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        Investments – NBN Co Limited

        $13.8 billion

        Valuation of the Australian Government’s investment in NBN Co Limited

        KAM

        Higher

        • Infrastructure adopted a different valuation technique from the previous period, with the revised technique focused on an income approach (previously recorded as a net assets investment). This required Infrastructure to develop an appropriate valuation model to estimate the fair value of NBN Co Limited. The adoption of the income approach in 2019–20 is considered appropriate given the transition of NBN Co Limited to an operational focus (and cash flows), from a primarily construction focus in previous periods;
        • the adopted valuation technique, a discounted cash flow model, is characterised by increased complexity and application of judgement. The use of this model requires Infrastructure to make significant judgements in the selection of assumptions and inputs, such as projected future cash flows, weighted average cost of capital, terminal values and discount rates that are based on primarily unobservable data; and the sensitivity of the valuation model to changes in the selection of key assumptions applied to the model, and
        • the significance of the balance of the investment in NBN Co Limited to the Australian Government’s financial statements.

        Administered

        Investments – Australian Postal Corporation, Australian Rail Track Corporation and Airservices Australia

        $5.9 billion

        Valuation of the Australian Government’s investment in the Australian Postal Corporation, Australian Rail Track Corporation and Airservices Australia

        KAM

        Higher

        • valuations are subject to complex estimation processes using a discounted cash flow model. The use of this model requires Infrastructure to make significant judgements in the selection of assumptions and inputs, such as projected future cash flows, weighted average cost of capital, terminal values and discount rates that are based on primarily unobservable data;
        • level of estimation uncertainty created in the estimation of future cash flows, as noted above, due to the economic impacts of the COVID-19 situation, particularly on the revenue generating activities of each entity, specifically Airservices Australia given the exposure of revenues to international travel; and
        • complexities in selecting the appropriate valuation approach to account for the valuation of the Australian Rail Track Corporation due to the construction and delivery of the $9.1 billion Inland Rail project being undertaken by the company.

        Administered advances and loans

        $21.5 billion

        loan interest revenue

        $735.6 million

         

        Recognition and measurement of loans and advances

        KAM

        Moderate

        • the significance of the balance of the loans administered by Infrastructure, mainly the $19.5 billion facility available to NBN Co Limited, and the $2.0 billion facility available to the proponents of the Westconnex Motorway project;
        • level of management judgement involved in calculating expected credit losses including the recoverability of the loans at balance date. Particularly, for the loan to NBN Co Limited this is based on cash flow forecasts, for which small changes in assumptions can result in material impacts on the estimated cash flows and rate of return; and
        • complexity of the valuation and required calculations for loan balances which attract concessional terms, including the level of estimation required to determine the appropriate market rate for the concessional component of new loans.

        National Partnership Payments

        $4.4 billion as reported as grants expenses by the Department of the Treasury

        Occurrence of National Partnership Payment expenses

        Moderate

        • complex and financially significant programs subject to detailed legislative conditions particularly imposed by the National Land Transport Act 2014 and the ‘Notes on Administration’ which provide guidance to support the programs; and
        • level of subjectivity and judgement applied in determining whether a recipient meets eligibility and funding milestone requirements.

        Administered

        grants expense

        $4.8 billion

        grants payable

        $44.4 million

        Occurrence of grant expenses

        Moderate

        • complex, significant and diverse range of programs that include a number of different administrative and legislative arrangements and conditions; and
        • level of subjectivity and judgement applied in determining whether a recipient meets eligibility and funding milestone requirements.

        Impacts all financial statements line items

        Accuracy, completeness and validity of data in the Financial Management Information System (FMIS) implemented by Communications on 1 July 2019

        Moderate

        • complexity of the process to implement a new FMIS by Communications given the complexity of the accounting processes and balances recorded; and
        • increase in risk of misstatement where internal controls supporting the implementation, such as change management and privileged user access, do not operate effectively.

        Impacts all financial statements line items

        Machinery of Government changes, particularly the valuation and reporting of assets and liabilities transferred to and from Infrastructure as a result of such changes

        Moderate

        • significance of the transfer of assets, liabilities, revenue and expenses from Communications to Infrastructure which will increase the complexity of the financial statements preparation process; and
        • timely recognition and alignment of accounting policies for assets, liabilities, revenue and expenses transferred to Infrastructure.
            

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

        Audit results

        5.10.18 As previously noted in Auditor-General Report No.38 2019–20 Interim Report on Key Controls of Major Entities the ANAO’s interim audit procedures identified weaknesses in the governance process and framework for the management of changes and privileged users within the FMIS implemented by Communications on 1 July 2019. As a result of these weaknesses the ANAO adjusted the audit approach to mainly focus on substantive tests of detail in order to obtain sufficient and appropriate audit evidence in the absence of an effective control framework for transactions and balances initiated through the Communications FMIS. From 1 July 2020 the FMIS is no longer in use, and all transactions are now processed through the existing Infrastructure FMIS.

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

        Table 5.10.5: Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        2a

        (2)b

        Total

        2

        (2)

             

        Note a: The two moderate findings included in the closing position for 2018–19 have been transferred from Communications. These findings relate to continuing processes now administered by Infrastructure following machinery of government changes.

        Note b: The moderate audit finding ‘risk management practices relating to NBN Co’s loan facility’ was resolved at the interim phase of the audit as reported in ANAO Report No.38 2019–20 Interim Report on Key Controls of Major Entities.

        Source: ANAO 2019–20 audit results.

        Resolved moderate audit finding

        Documentation of significant estimates and judgements

        5.10.20 During 2018–19 the ANAO identified that Communications did not adequately compile documentation to support the accounting position adopted on key material estimates and judgments, relating mainly to the Australian Government’s investment in and loan to NBN Co Limited. Accounting position papers provided by Communications did not adequately address the application of the relevant accounting standard/s, consideration of alternative assumptions or outcomes, justification for the assumptions used and Communication’s basis for the ranges adopted. The completeness of papers and the untimely delivery by Communications on its documented accounting positions, increased the risk of material misstatements to the financial statements.

        5.10.21 In 2019–20, following the transfer in of Communications’ functions, Infrastructure took steps to address this finding and strengthen the planning and execution of the financial statement preparation process. Infrastructure implemented the following processes to address the risks identified in this finding:

        • developed a timely and comprehensive financial statements preparation plan that included a detailed risk assessment, including on areas of accounting practice relating to estimation and judgement, which informed the financial statement preparation process; and
        • critically documented significant accounting judgements in accounting position papers, including the valuation of administered investments, impairment of loans and advances, supported where appropriate by external technical or professional advice and subjected the judgements made to an appropriate governance and approval process, including review by a sub-committee of the Audit and Risk Committee.

        5.10.22 As a result of the actions taken to address the finding the ANAO considers the finding to have been resolved.

        Airservices Australia

        5.10.23 Airservices Australia (Airservices) is responsible for the provision of air navigation services across Australian and oceanic airspace, and the provision of aviation rescue firefighting services at major Australian airports. Supported by a national network of communications, surveillance and navigation facilities and infrastructure, Airservices is funded through charges levied on its customers and borrowings from debt markets.

        5.10.24 Consistent with the Australian Government’s response to the COVID-19 pandemic, Airservices was involved in a number of measures aimed at supporting the Australian airline industry and the financial sustainability of Airservices. These measures included the government’s decision to waive $92.5 million in charges to airlines and receipt of government funding in lieu of reduced airways revenue due to the COVID-19-related downturn in aviation traffic. The government funding included $250.0 million in 2019–20 with a further $581.8 million due to be received in 2020–21. This has not resulted in any payments to the Australian public or changes to existing financial management internal controls.

        Summary of financial performance

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

        Table 5.10.6: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total income

        1,021.5

        1,127.1

        Total expenses

        1,058.0

        1,039.3

        Income tax expense

        (11.5)

        25.4

        Profit/(loss) after income tax

        (25.1)

        62.4

        Total other comprehensive income/(loss) after tax

        (30.1)

        (17.6)

        Total comprehensive income/(loss)

        (55.1)

        44.8

        Total assets

        2,312.2

        2,039.4

        Total liabilities

        1,815.5

        1,289.7

        Total equity

        496.7

        749.7

           

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

        5.10.26 Total income has been significantly impacted by the COVID-19 pandemic with a reduction of approximately $348.0 million of revenue from charges to external customers offset by receipt of $250.0 million from government to supplement this reduced revenue.

        5.10.27 Total expenses increased due to a $20.0 million increase in impairment losses associated with expected credit losses on overseas debts as a result of the COVID-19 pandemic and an increase in $11.0 million depreciation expense mainly associated with the recognition of right-of-use assets, slightly offset by less write-down and impairment of assets compared to the prior year.

        5.10.28 Total assets increased primarily as a result of assets under construction additions of $294.5 million associated mainly with the replacement of the existing air traffic management system, and the recognition of $134.3 million of right-of-use assets under AASB 16. This was partially offset by a $152.4 million of depreciation and amortisation on these assets. A decrease in the value of defined benefit superannuation scheme assets of $66.9 million and trade and other receivables of $93.9 million was partially offset by an increase in cash and equivalents of $136.1 million.

        5.10.29 Total liabilities has increased mainly due to Airservices borrowing $475.0 million to provide funds during the pandemic and the $117.0 million recognition of lease liabilities under AASB 16.

        Key areas of financial statements risk

        5.10.30 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 Airservices’ 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 5.10.7. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.7: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Airways revenue

        $745.7 million

        Completeness and accuracy of airways revenue

        Higher

        • complexity of the flight traffic data captured that is used as the basis for customer billings; and
        • dependence on multiple integrated IT systems.

        Property, plant and equipment

        $957.9 million

        assets under construction

        $501.0 million

        intangibles

        $87.4 million

        Management, recognition and valuation of assets under construction, and existing, completed property, plant and equipment and intangibles

        Higher

        • sensitivity of the valuation of completed asset infrastructure, which is a material balance for Airservices, to changes in the assumptions used in valuation models including technical obsolescence; and
        • complexity of capturing of costs related to assets under construction due to the technical nature of assets and the judgements involved in assessing whether costs can be capitalised and the appropriate point of recognition.

        Fair value of defined benefit plan assets

        $842.4 million

        present value of the defined benefit obligation $698.8 million

        Valuation of defined benefit superannuation obligations

        Moderate

        • complexities associated with the valuation of the defined benefit asset requiring the use of an actuary; and
        • judgement required in estimating future liabilities and the sensitivities of the fund to economic and demographic assumptions supporting the estimate.

        Other financial assets $17.4 million

        Borrowings

        $1.2 billion

        Unused Credit Facilities

        $715.0 million

        Management of and accounting for, a range of financial instruments

        Moderate

        • complex nature of financial instruments held by Airservices, including interest rate swaps and forward exchange contracts; and
        • extensive and complex presentation and disclosure requirements, including foreign currency and interest rate exposures and the fair value of complex financial instruments.

        Aviation Rescue and Fire Firefighting Services (ARFFS) decontamination provision

        $59.3 million

        Calculation of provisions for legal obligations and related contingencies

        Moderate

        • complexity of the underlying event that gave rise to a potential legal obligation associated with ARFFS decontamination; and
        • significant judgement required in valuing the ARFFS decontamination provision and contingent liability.

        Various expenses and capital items

        Management and accounting of contracts

        Moderate

        • significant monetary value of contracts; and
        • large number of diverse contracts that are complex in nature.
            

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

        Audit results

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

        Australian Broadcasting Corporation

        5.10.32 The Australian Broadcasting Corporation (ABC) is responsible for informing and educating, facilitating public debate and fostering the performing arts by providing innovative and comprehensive broadcasting services of a high standard to the nation.

        Summary of financial performance

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

        Table 5.10.8: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        1,135.6

        1,149.1

        Net cost of services

        1,070.7

        1,043.2

        Revenue from government

        1,062.2

        1,045.9

        Surplus/(deficit) attributable to the Australian Government

        (8.5)

        2.7

        Total other comprehensive income/(loss)

        (10.0)

        35.6

        Total comprehensive income/(loss) attributable to the Australian Government

        (18.4)

        38.3

        Total assets

        2,017.5

        1,401.8

        Total liabilities

        964.2

        330.1

        Total equity

        1,053.3

        1,071.7

           

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

        5.10.34 The increase in net cost of services is driven predominately by a reduction in insurance recoveries revenue of $37.5 million associated with building works for the ABC’s Ultimo building.

        5.10.35 Total revenue from government increased by $16.4 million reflecting the indexation of funding to the ABC to continue to support local news and current affairs services and the impact of the pause in indexation on ABC’s operational funding. The movement in revenue from government is also a result of the additional efficiency savings associated with savings in back office operations.

        5.10.36 The increase in assets is a result of the initial recognition of right-of-use assets associated with the transition to AASB 16. As at 30 June 2020, the ABC recognised right-of-use assets associated with land of $22.4 million, buildings of $4.5 million and plant and equipment of $628.7 million. The increase in total liabilities is a result of $635.8m lease liabilities associated with implementation of AASB 16.

        Key areas of financial statements risk

        5.10.37 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 ABC’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 5.10.9. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.9: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Total assets

        land and buildings

        $712.9 million

        Valuation and accuracy of land and buildings and assets held for sale

        Significant

        • valuations are sensitive to changes in the assumptions used in the valuation models, and contain highly specialised components.

        Total assets

        inventories

        $105.1 million

        Valuation and accuracy of program inventory

        Significant

        • complexities can arise from capturing the actual costs of various internally developed programs; and
        • assessment of whether program inventories are impaired is subject to judgement.

        Total liabilities

        lease liability

        $635.8 million

        Total assets

        right-of-use assets

        $655.6 million

        Accuracy and completeness of transition to AASB 16

        Lower

        • 2019–20 was the first year of adoption of AASB 16. The transition to the new standard involves specific transition financial statement disclosures, new on-going financial statement disclosures and new on-going processes and controls surrounding the capture and calculation of amounts under the new standard.
            

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

        Audit results

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

        Table 5.10.10:  Status of audit finding

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        (1)a

        Total

        1

        (1)

             

        Note a: The moderate audit finding relating to security management has been downgraded to a minor audit finding.

        Source: ANAO 2019–20 audit results.

        Resolved moderate audit finding

        Security management

        5.10.39 As part of the 2018–19 audit, the ANAO tested the effectiveness of the ABC’s management of users and access controls, including for privileged users, and identified weaknesses in relation to the management of: domain and enterprise users; SAP HR users; and SAP Finance application users. The ANAO also identified weaknesses in relation to management of user access controls.

        5.10.40 During the 2019–20 audit, the ANAO assessed the ABC’s progress in resolving the weaknesses previously reported. The ANAO confirmed: all users with privileged access to the SAP Finance application (including users with the ability to implement changes) were appropriate; domain and enterprise administrator user accounts had been disabled appropriately; and SAP HR user accounts had been appropriately removed. The ANAO also confirmed that user access reviews had been completed.

        5.10.41 The ANAO identified that weaknesses remained relating to the maintenance of evidence to confirm the completeness and accuracy of privileged user access reviews. As a result of the progress observed by the ANAO, this finding has been downgraded to a minor finding.

        Australian Communications and Media Authority

        5.10.42 The Australian Communications and Media Authority (ACMA) is responsible for the regulation of broadcasting, radio communications (spectrum management), telecommunications and online content.

        Summary of financial performance

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

        Table 5.10.11:  Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (107.2)

        (102.1)

        Revenue from government

        96.0

        90.2

        Surplus/(deficit) attributable to the Australian Government

        (11.2)

        (11.9)

        Total other comprehensive income/(loss)

        0.6

        (0.4)

        Total comprehensive income/(loss) attributable to the Australian Government

        (10.6)

        (12.3)

        Total assets

        118.6

        66.3

        Total liabilities

        82.1

        28.6

        Total equity

        36.6

        37.7

           

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

        5.10.44 The increase in the net cost of services relates to a $1.8 million increase in employee benefits due to an increase in average staffing levels and a reduction in the government bond rate in addition to a $2.5 million increase in contractors expense due to work on the eSafety program.

        5.10.45 The movement in asset and liabilities is primarily due to the recognition of $52.2 million of right-of-use assets and $53.4 million of lease liabilities associated with AASB 16.

        Table 5.10.12: Key administered financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        10.7

        13.8

        Total income

        1,415.3

        705.1

        Surplus/(deficit) after income tax

        1,404.6

        691.3

        Total comprehensive income/(loss)

        1,404.6

        691.3

        Total assets administered on behalf of Government

        57.5

        563.5

        Total liabilities administered on behalf of Government

        131.2

        108.9

        Net assets/(liabilities)

        (73.7)

        454.6

           

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

        5.10.46 In 2019–20 total income increased as result of ACMA receiving the full proceeds from the sale of the spectrum access licences of $852.9 million. As the sale was finalised in 2019–20 no accrued revenue for the licences was recognised as it had been in 2018–19 therefore resulting in a decrease in total assets administered on behalf of the Government. The increase in total income was partially offset by lower taxes and finance income, thereby resulting in an overall increase in income of $710.2 million.

        5.10.47 Total expenses decreased as a result of $0.5 million less IT and communications expenditure in-line with the funding profiles of the administered budget measures for ACMA and a $4.7 million decrease in impairment expenses as a result of bad debtors previously recognised as part of the impairment provision being recovered in 2019–20.

        5.10.48 The increase in total liabilities administered on behalf of the government was due to the $21.8 million increase in unearned revenue balances relating to radio communication licence fees paid up front which is primarily due to industry demand and timing of payments.

        Key areas of financial statements risk

        5.10.49 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 ACMA’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 5.10.13. No significant or moderate audit findings were identified relating to this key area of risk.

        Table 5.10.13:  Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

         

        Factors contributing to the risk assessment

        Administered income

        $1,415.3 million

        receivables and accrued revenue

        $57.5 million

        payables – unearned income

        $131.2 million

        Recognition and measurement of administered income, receivables and unearned income

        Higher

        • the significance of the balance; and
        • application of professional judgement is required in determining when to recognise revenue, as spectrum management is technically complex and involves licensing, auctions and trading.
           188

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

        Audit results

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

        Australian Postal Corporation

        5.10.51 The Australian Postal Corporation (Australia Post) is a government business enterprise responsible for operating post offices and distributing mail and parcels in Australia and internationally.

        5.10.52 Consistent with the Australian Government’s response to the COVID-19 pandemic, Australia Post has implemented a number of measures aimed at supporting members of the Australian public who are likely effected by the pandemic. These measures include:

        • regulatory relief to Australia Post until 30 June 2021 in recognition of the operating constraints on the business as a result of the COVID-19 pandemic including:
          • extending the required delivery time for regular intrastate letters to up to five business days after the day of posting;
          • adjusting the delivery schedule (for metropolitan areas only) from every business day to every second business day, but with no change to delivery frequency in rural or remote areas; and
          • suspending the priority letters service.
        • priority letters were processed and delivered as regular letters; and
        • all delayed letter samples impacted by COVID-19 were included in the service performance result for the financial year ending June 2020 and therefore were not removed under a force majeure event; impacting the performance results from March to June 2020.
        Summary of financial performance

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

        Table 5.10.14:  Key financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total revenue and income

        7,499.2

        6,989.8

        Total expenses

        7,445.6

        6,948.7

        Profit/(loss) before income tax

        53.6

        41.1

        Income tax benefits/(expenses)

        (10.7)

        (0.5)

        Net profit/(loss) for the year

        42.9

        40.6

        Total other comprehensive income/(loss)

        (110.6)

        (22.6)

        Total comprehensive profit/(loss) for the year

        67.7

        18.0

        Total assets

        6,785.3

        5,542.7

        Total liabilities

        4,582.2

        3,229.6

        Total equity

        2,203.1

        2,313.1

           

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

        5.10.54 Australia Post reported a decrease in total comprehensive income during 2019–20 which is reflective of the re-measurement of the Australia Post Superannuation Scheme defined benefit plans amounting to a loss of $161.7 million. This is offset by its corresponding tax effect of $48.5 million. This loss was further offset by the increase in the effective portion of fair value changes of $2.3 million (before tax) relating to the revaluation of derivatives designated in cash flow hedges. The fluctuations in other balances reflect normal business activities.

        5.10.55 The 2019–20 income tax expense in the current period has been impacted by tax benefits arising from non-assessable gains in the sale of properties ($8.9 million) offset by non-deductible impairment of goodwill ($3.1 million). The remainder of the increase is attributable to the increase in profits year on year.

        5.10.56 The increase in assets was primarily attributed to the recognition of right-of use assets recorded on balance sheet as a result of the implementation of AASB 16. As a consequence of the AASB 16 implementation, there was also the recognition of Deferred Tax Assets as a result of bringing lease liabilities onto the balance sheet. The fluctuations in other balances reflect normal business activities.

        Key areas of financial statements risk

        5.10.57 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 Australia Post’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 5.10.15, 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 5.10.15: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Goods and services income

        unearned postage revenue

        $92.2 million

        Recognition of Revenue

        Cut off and accuracy of goods and services revenue and the valuation of unearned postage revenue

        KAM

        Higher

        • the judgement and assumptions used to estimate the amount of revenue to be deferred for stamps sold but not yet used;
        • the judgement required in the selection and application of accounting policies for new and diverse revenue stream; and
        • the complexity of contracts and arrangements entered into where they include multiple performance obligations and volume targets which affects the contracted price.

        Intangible assets

        goodwill

        $507.7 million

        Valuation and impairment of goodwill and indefinite life intangible assets

        KAM

        Moderate

        • the estimation process is complex and judgemental and includes assumptions related to future cash flows and discount rates.

        Net superannuation asset

        $626.9 million

        Valuation of the Australia Post Superannuation Scheme

        KAM

        Moderate

        • the complexity of the valuation including the sensitivity of the economic and demographic assumptions supporting the calculation.

        lease liabilities $1,130.9 million and right-of-use assets of $1,032.2 million

        Accounting for AASB 16 and its disclosures

        KAM

         

        Moderate

        • the significance of these balances to the financial statements as well as the complexity and judgments involved in the transition and application of AASB 16.
            

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

        5.10.58 The following performance audit report was tabled during 2019–20 relevant to the financial management or administration of Australia Post:

        • Auditor-General Report No.1 2019–20 Cyber Resilience of Government Business Enterprises and Corporate Commonwealth Entities.

        5.10.59 The audit objective was to assess the effectiveness of the management of cyber security risks by Australia Post, ASC Pty Ltd and the Reserve Bank of Australia. Australia Post was found to not effectively manage cyber security risks. The ANAO recommended that Australia Post should continue to implement its cyber security improvement program and key controls across all its critical assets to enable cyber risks to be within its tolerance level. In light of the findings the ANAO increased scrutiny over the key financial systems that Australia Post relies on to prepare the financial statements. There were no additional audit findings identified.

        Audit results

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

        Australian Rail Track Corporation

        5.10.61 The Australian Rail Track Corporation (ARTC) is responsible for the development, maintenance, management and delivery of some of Australia’s major rail networks, including the national interstate rail network, the Hunter Valley coal rail network, and the construction of the Inland Rail network. In May 2017, the Australian Government announced it would invest up to $8.4 billion in equity funding into ARTC in order for the company to deliver the Inland Rail network. Inland Rail is a 1,700-kilometer rail line that will link Brisbane and Melbourne through regional Australia. Inland Rail is the largest rail freight infrastructure project ever undertaken in Australia.

        Summary of financial performance

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

        Table 5.10.16: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        1,628.9

        1,261.5

        Revenue

        852.3

        847.7

        Income tax expense

        83.7

        34.6

        Profit/(loss) attributable to the Australian Government

        (860.3)

        (448.4)

        Total other comprehensive income/(loss)

        (29.5)

        (138.5)

        Total comprehensive income/(loss) attributable to the Australian Government

        (889.8)

        (586.9)

        Total assets

        4,405.2

        4,599.0

        Total liabilities

        1,578.8

        1,285.1

        Total equity

        2,826.5

        3,313.9

           

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

        5.10.63 Total expenses increased by $367.4 million, contributing to the total loss recorded by ARTC, mainly due to impairment of non-financial assets recognised at fair value (refer to paragraph 5.10.64) and the continuing delivery of Inland Rail which increased project costs.

        5.10.64 The decrease in total assets is mainly due to the valuation of property, plant and equipment, with ARTC recognising $766.5 million of impairment charges during 2019–20. ARTC recognises non-financial assets on a fair value basis determined using an income based discounted cash flow analysis with impairments recognised where the carrying value of assets exceeds the calculated fair value. The impairment was impacted in 2019–20 by:

        • changes in key inputs to the cash flow analysis for the interstate network and changes to forecast future cash flows due to continued challenging market conditions expected as a result of the impact of the COVID-19 pandemic resulting in weakening demand; and
        • the increased expenditure on Inland Rail assets and reflecting the future cash flows and returns to ARTC in relation to this investment.

        5.10.65 Total liabilities increased by $293.7 million due to a number of factors including: the recognition of a lease liability of $83.4 million due to AASB 16, $125.0 million receipts from government for grant funded projects recognised as revenue over the life of the underlying infrastructure constructed with grant proceeds, and $109.7 million drawdown of borrowings to support ARTC’s capital and operating needs including contributions to the Inland Rail project.

        Key areas of financial statements risk

        5.10.66 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 ARTC’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 5.10.17. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.17:  Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Property, plant and equipment

        $3.9 billion

        Impairment expenses

        $366.6 million

        Valuation of infrastructure assets

        Higher

        • the fair value of infrastructure assets is estimated using a complex discounted cash flow model;
        • the fair value model is subject to increased judgement and is sensitive to changes in assumptions, including forecasts of business performance, cash flows in future years and discount rates; and
        • in 2019–20, ARTC were required to make judgements around the impact of the COVID-19 situation on future cash flows and revenue growth, which materially impacted the calculated fair value.

        Impairment expenses

        $399.9 million

        Recognition and valuation of assets under construction for the Inland Rail network

        Higher

        • judgement and estimation required by ARTC in apportioning capital and operating costs across the whole of term construction of the Inland Rail given the nature of the project, significance of the investment value and expected future returns on investment; and
        • judgement and estimation applied in determining whether assets for Inland Rail are impaired. ARTC estimate impairment on these assets using a complex discounted cash flow model which incorporates management’s judgements on future cash flows, revenue and discount rates.

        Access Revenue

        $761.2 million

        Trade receivables

        $72.6 million

        Completeness of access revenue

        Higher

        • subject to management estimates and judgement to determine the amount of revenue recognised due to impact of regulatory access undertakings; and
        • complexity of underlying process for recognition of access revenue by rail operators.

        Deferred tax assets (net)

        $85.2 million

        Income tax expense

        $83.7 million

        Recognition and measurement of taxation related balances

        Moderate

        • tax liabilities and deferred tax assets (DTAs) arise predominantly from asset revaluations, which are subject to judgement and uncertainty; and
        • increased judgement applied in recognising the amount of the DTAs that ARTC will be able to utilise to offset future taxation expense.

        Deferred income – government grants

        $657.8 million

        grant Income

        $48.8 million

        Occurrence and classification of grants in the income statement

        Moderate

        • judgement is involved in determining the appropriate recognition point for grant contributions in accordance with the relevant requirements of the accounting standards and nature of the grant funded assets; and
        • the nature of some grants from government means that ARTC recognise revenue (in accordance with the accounting standards) over a significant period of the operating life of an asset constructed.

        Impacts multiple financial statements line items

        Complexity of IT environment

        Moderate

        • complexity and number of IT systems that support the recognition and processing of transactions and balances which have significant impact on the preparation of the financial statements.
            

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

        Audit results

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

        Moorebank Intermodal Company Limited

        5.10.68 The Moorebank Intermodal Company Limited (MIC) was established to oversee the development and future operation of the Moorebank intermodal terminal in Sydney’s south-west. It is designed to enable more freight to be moved by rail both locally and nationally. The Moorebank terminal has an import and export facility with a direct link to Port Botany, and also an interstate and regional facility to connect to the national rail freight network. The terminal will be developed and operated by co-investor Sydney Intermodal Terminal Alliance (SIMTA).

        5.10.69 In May 2015, MIC established two wholly owned subsidiaries: the Moorebank Intermodal Development Investment Trust (MIDIT) and the Moorebank Intermodal Development Rail Trust (MIDRT). The trusts were established to facilitate the delivery of MIC’s obligations under its agreements with SIMTA and to allow for divestment by the Commonwealth of its financial interests in the terminal development. These entities are reported in the consolidated financial statements of MIC. The MIDIT jointly holds the Land Precinct Trust with SIMTA to undertake the land development.

        Summary of financial performance

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

        Table 5.10.18:  Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        52.9

        113.2

        Total revenue

        17.9

        1.1

        Income tax benefit

        8.2

        30.4

        Income/(loss) for the year

        (26.8)

        (81.7)

        Total other comprehensive income/(loss)

        8.2

        12.2

        Total income/(loss) for the year

        (18.6)

        (69.5)

        Total assets

        515.3

        450.5

        Total liabilities

        220.2

        208.3

        Total equity

        295.2

        242.2

           

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

        5.10.71 The increase in total revenue is due to the opening of the Moorebank import-export freight terminal, with the rail link generating finance lease income of $9.1 million and a gain of $7.5 million as a result of the fair value recognition of the rail access finance lease from 1 July 2019.

        5.10.72 Total liabilities have increased as a result of the revised costs for preparation works including remediating and rezoning land associated with the delivery of the intermodal terminal, contractual obligations associated with the Moorebank Intermodal voluntary planning agreements and construction of Moorebank Avenue. The increase is a result of higher than forecast construction costs, which have been offset by the outflow of costs against this liability during the financial year. Total expenses decreased from the prior year reflecting the smaller increase in the total liability for the land and site preparation.

        5.10.73 Total assets have increased due to $30.7 million additional capitalised costs; and valuation increases in both the rail access lease asset of $7.5 million and the Precient Land Trust of $15.0 million

        Key areas of financial statements risk

        5.10.74 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 MIC’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 5.10.19. MIC continues to have an unresolved moderate risk finding relating to the support and quality assurance over the financial statement close process.

        Table 5.10.19:  Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Non-financial liabilities – provisions

        $209.1 million

        Valuation of the land remediation; Moorebank Avenue works and voluntary planning contribution provisions

        Higher

        • judgements and estimates involved in capturing remediation and site preparation costs, including assessing the level of work required for the completion of these projects.

        Non-financial assets – equity accounted investments

        $180.0 million

        Recognition and disclosure of the value of the Precinct Land Trust

        Moderate

        • complexity of the investment structure; and
        • valuation of the land is subject to judgements and estimates associated with a discounted cash flow methodology, including future cash flows, rates of return and discounting.

        Non-financial assets – finance lease

        $170.1 million

        Valuation of the finance lease receivable for rail access charges

        Moderate

        • valuation of the rail access lease is subject to judgements and estimates associated with a discounted cash flow methodology, including future cash flows, rates of return and discounting.

        Deferred tax assets $72.7 million

        Valuation of deferred tax assets

        Moderate

        • judgements in involved the assessment of recoverability of deferred tax assets against future forecast profits; and
        • judgements involved in the apportionment of deductible costs for the derivation of the deferred tax asset.
            

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

        Audit results

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

        Table 5.10.20:  Status of audit findings

        Category

        Closing position (2018–19)

        New findings (2019–20)

        Findings resolved (2019–20)

        Closing position (2019–20)

        Moderate (B)

        1

        1

        Total

        1

        1

             

        Source: ANAO 2019–20 audit results.

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

        Unresolved moderate audit finding

        Support and Quality Assurance over the financial statement close process

        5.10.77 During the 2017–18 final audit, the ANAO identified weaknesses in the financial statements processes that involved judgements, and the presentation of MIC’s consolidated financial statements. Key determinations and decisions associated with financial statements preparation, including valuations, which were finalised late or with weaknesses in appropriate quality assurance. These observations continued for the 2019–20 final audit.

        5.10.78 These weaknesses highlighted opportunities for improvements regarding management’s quality assurance and support processes to enhance the quality of its financial reporting and reduce the risk of error and the potential for material misstatement to the Group’s consolidated financial statements. The ANAO will review progress in addressing this issue as part of the 2020–21 audit.

        National Capital Authority

        5.10.79 The National Capital Authority (NCA) is responsible for managing the strategic planning, promotion and enhancement of Canberra as the national capital for all Australians through the development and administration of the National Capital Plan, the operation of the National Capital Exhibition, delivery of education and awareness programs, and works to enhance the character of the national capital.

        Summary of financial performance

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

        Table 5.10.21: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (12.2)

        (17.9)

        Revenue from government

        10.4

        17.2

        Surplus/(deficit) attributable to the Australian Government

        (1.8)

        (0.7)

        Total other comprehensive income

        (0.1)

        Total comprehensive income/(loss) attributable to the Australian Government

        (1.9)

        (0.7)

        Total assets

        24.0

        22.8

        Total liabilities

        6.6

        5.8

        Total equity

        17.4

        17.0

           

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

        5.10.81 The reduction in net cost of services is primarily due to the reclassification of $8.0 million costs of maintaining national land in the Australian Capital Territory from departmental to administered to provide consistency with the recognition of the underlying property.

        Table 5.10.22:  Key administered financial statements items

        Key financial statements items

        2018–19

        ($m)

        2018–19

        ($m)

        Total expenses

        42.4

        37.1

        Total income

        22.8

        23.6

        Surplus/(deficit)

        (19.6)

        (13.5)

        Total other comprehensive income

        129.2

        6.4

        Total comprehensive income/(loss)

        109.6

        7.1

        Total assets administered on behalf of Government

        969.5

        846.6

        Total liabilities administered on behalf of Government

        30.0

        27.3

        Net assets/(liabilities)

        939.5

        819.3

           

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

        5.10.82 Total expenses increased due to the reclassification of the costs relating to the national land from departmental to administered. In 2019–20 NCA also reported a one-off increase of $3.1 million to develop a business case for upgrading the Commonwealth Avenue Bridge through strengthening, widening and safety barrier replacement. These effects were partially offset by lower impairment expenses following large adjustments in the previous financial year.

        5.10.83 The reduction in total income predominantly relates to reductions in parking revenue and associated fines during periods of ‘working from home’ arrangements associated with the COVID-19 pandemic. These reductions were partially offset by an increase in cost recovery revenue following the transfer of estate costs to administered.

        5.10.84 The increase in total assets was primarily due to a $129.2 million revaluation increment on land, property, plant and equipment and $22.8 million of asset additions.

        Key areas of financial statements risk

        5.10.85 The ANAO completed appropriate audit procedures on all material items. The ANAO also assesses the IT general and application controls for key systems that support the preparation of NCA’s financial statements. The ANAO focuses 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 5.10.23. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.23:  Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        other payables

        $21.1 million

        Departmental

        other payables

        $3.2 million

        Classification and valuation of the construction activities relating to NCA’s responsibility to develop, further enhance and replace assets on national land

        Moderate

        • complexities in determining the value of work in progress at balance date as works are often between defined construction milestones and professional judgement is required.

        Administered

        non-financial assets

        $967.6 million

        Valuation and accounting for land, buildings and infrastructure located within the National Capital Estate

        Moderate

        • complexities in determining the fair value of land, deemed for the special purposes of Canberra as the national capital, and related capital works.
            

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

        Audit results

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

        National Gallery of Australia

        5.10.87 The National Gallery of Australia (the Gallery) is responsible for developing and maintaining a national collection of works of art to exhibit or to make available for others to exhibit; and making the most advantageous use of the national collection in the national interest.

        Summary of financial performance

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

        Table 5.10.24:  Key financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (61.8)

        (56.5)

        Revenue from government

        59.2

        45.8

        Surplus/(deficit) attributable to the Australian Government

        (2.6)

        (10.7)

        Total other comprehensive income/(loss)

        299.3

        Total comprehensive income/(loss) attributable to the Australian Government

        296.7

        (10.7)

        Total assets

        6,665.1

        6,345.4

        Total liabilities

        13.5

        12.4

        Total equity

        6651.6

        6,333.0

           

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

        5.10.89 The increase in net cost of services is largely due to $4.6 million increase in supplier expenses and a $3.4 million increase in employee expenses. Employee expenses increased primarily as a result of redundancy provisions recognised in accordance with the recently announced operational restructure. Supplier expenses increased largely as a result of in-kind support for exhibition productions for the Know My Name campaign.

        5.10.90 The Gallery received additional government revenue of $12.7 million for support whilst there was a decline in commercial revenue due to the COVID-19 pandemic.

        5.10.91 Total assets increased predominantly as a result of a $179.5 million increase in value of collection assets and $118.4 million increase in the value of land and buildings. In addition, there was an increase in investments, with the Gallery investing the funding received in advance from government in term deposits. Total liabilities increased due to the provision for redundancies and offset by a decrease in payables due to reduced activity.

        Key areas of financial statements risk

        5.10.92 The ANAO completed appropriate audit procedures on all material items. 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 5.10.25. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.25:  Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Heritage and cultural assets

        $6,159.3 million

        Valuation of items in the heritage and cultural collection

        Higher

        • judgement required in valuing iconic artwork through the use of observable market inputs; and
        • the complexity of the valuation model applied to the general collection.

        Buildings

        $401.2 million

        Valuation of buildings

        Higher

        • judgement required in selecting the assumptions used in determining the fair value including assessing the impact of the building condition and specialised use.
            

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

        Audit results

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

        National Library of Australia

        5.10.94 The National Library of Australia (the Library) is responsible for developing and maintaining a national collection of library material, including a comprehensive collection of material relating to Australia and the Australian people, and to make this material available to the public.

        Summary of financial performance

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

        Table 5.10.26: Key financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (63.4)

        (61.3)

        Revenue from government

        (54.5)

        (54.7)

        Surplus/(deficit) attributable to the Australian Government

        (8.8)

        (6.7)

        Total other comprehensive income/(loss)

        (7.5)

        Total comprehensive income/(loss) attributable to the Australian Government

        (16.4)

        (6.4)

        Total assets

        1,705.0

        1,710.0

        Total liabilities

        18.1

        14.6

        Total equity

        1,687.0

        1,695.1

           

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

        5.10.96 The increase in net cost of services is driven by a reduction in own source revenue of $2.1 million as a result of a reduction in sales from the closure of the library bookshop as a result of the COVID- 19 pandemic and a reduction in interest revenue from investments due to lower interest rates.

        5.10.97 The decrease in assets is due to the decline in the value of Heritage and Cultural Assets of $20.5 million, partially offset by an increase in the building value of $5.3 million due to a revaluation that extended the useful live of the building and its components, as well as an increase of $5.2 million in collection intangibles driven by the digitisation of the existing collection.

        5.10.98 Total liabilities increased due to an increase in other payables of $1.3 million driven by an increase in unearned income and the recognition of lease liabilities of $1.3 million associated with the implementation of AASB 16.

        Key areas of financial statements risk

        5.10.99 The ANAO completed appropriate audit procedures on all material items. 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 5.10.27.

        Table 5.10.27: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Heritage and cultural assets

        $1.29 billion

        Valuation of the national collection

        Higher

        • significant judgement and expertise required to assess the value of items in the collection, due to the unique nature of the collection assets and lack of a market of comparable assets.
            

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

        Audit results

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

        NBN Co Limited

        5.10.101 The primary objective of NBN Co Limited (NBN Co) is to provide wholesale services to internet service providers. NBN Co is a government business enterprise incorporated under the Corporations Act 2001.

        5.10.102 To support its customers and the community during COVID-19 pandemic, NBN Co:

        • established a $150.0 million fund to connect low income households with home schooling needs, support emergency and essential services, and assist small and medium sized business and residential customers facing financial hardship;
        • enabled every Australian internet provider to order increased nbn network capacity of up to 40 per cent at no additional cost; and
        • introduced initiatives, to support customers in regional and remote communities through increased data download limits for customers on Sky Muster services and for customers on Sky Muster Plus services, increased the range of applications that do not account to monthly data quotas.
        Summary of financial performance

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

        Table 5.10.28:  Key departmental financial statements items

        Key financial statements items

        2019–20

        ($m)

        2018–19

        ($m)

        Total income

        3,881.0

        2,858.0

        Total expenses

        9,119.0

        7,737.0

        Profit/(Loss) before income tax

        (5,238.0)

        (4,879.0)

        Income tax benefit/(expense)

        (1.0)

        1.0

        Net Profit/(loss) for the year

        (5,239.0)

        (4,878.0)

        Total other comprehensive gain/(loss)

        2.0

        3.0

        Total comprehensive loss for the year

        (5,237.0)

        (4,875.0)

        Total assets

        36,850.0

        32,757.0

        Total liabilities

        34,750.0

        25,420.0

        Total equity

        2,100.0

        7,337.0

           

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

        5.10.104 In 2019–20, NBN Co generated revenue and income of $3.9 billion and reported a net loss of $5.2 billion, after taxation. Revenue increased by $1.0 billion primarily driven by higher activations during the year (1.8 million premises). Net loss after taxation increased due to higher subscriber costs resulting from an increase in brownfield activations, and a higher depreciation and amortisation expense in line with the increase in network assets and intangible assets.

        5.10.105 As at 30 June 2020, NBN Co reported total assets of $36.9 billion, an increase of $4.1 billion primarily due to an increase in network assets and intangible assets as the initial build was predominately completed, and the recognition of $1.5 billion in additional right-of-use assets due to the application of AASB 16.

        5.10.106 As at 30 June 2020, NBN Co reported total liabilities of $34.8 billion, an increase of $9.4 billion primarily due to the increases in borrowings, including the drawdown of $6.4 billion from the Government loan facility and $1.0 billion of working capital facilities, as well as an increase in lease liabilities of $2.3 billion due to the application of AASB 16 and the recognition of incremental leases aligned with the progression of the roll out.

        5.10.107 As at 30 June 2020, the contributed equity of $29.5 billion has been offset by accumulated losses of $27.4 billion.

        Key areas of financial statements risk

        5.10.108 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 NBN Co’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 5.10.29, including which areas 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 5.10.29:  Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Property, plant and equipment

        $33.7 billion

        Intangibles

        $2.1 billion

        Valuation of network assets

        KAM (Valuation of property, plant and equipment and intangible assets - impairment)

        KAM (Accuracy and completeness of depreciation and amortisation expense)

        Higher

        • accounting for the valuation of network assets is subject to a high degree of judgement and complexity arising in the estimation of the significant costs of network construction and software development.

        Construction liabilities

        $0.9 billion

        Valuation of construction liabilities

        KAM (Valuation of construction liabilities estimates)

        Higher

        • involvement of multiple delivery partners and the capitalisation of associated network assets based on their respective stage of completion at reporting date.

        Subscriber costs

        $2.4 billion

        Network assets

        $33.4 billion

        Lease liabilities

        $10.9 billion

        Accounting treatment of rights and obligations under significant contractual arrangements.

        KAM (Accounting treatment of rights and obligations under significant contractual arrangements)

        Higher

        • the agreements include arrangements for the lease of infrastructure as well as the payment of subscriber costs; and
        • these contracts are significant and complex in nature and represent a significant portion of the associated financial statements items.

        Telecommunications revenue

        $3.6 billion

        Accounting for and reporting telecommunications revenue

        Higher

        • revenue has increased significantly as the network continues to roll out with IT systems and controls continuing to evolve with scale.
            

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

        Audit results

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

        WSA Co Limited

        5.10.110 WSA Co Limited was established to construct and operate Western Sydney International (Nancy-Bird Walton) Airport in Badgerys Creek, in south-western Sydney, to the functional specifications determined by the Australian Government. WSA Co is a government business enterprise wholly owned by the Australian Government, represented by the Minister for Finance and the Minister for Population, Cities and Urban Infrastructure as shareholder ministers.

        5.10.111 The Australian Government plans to invest up to $5.3 billion into WSA Co to build Western Sydney Airport. This investment covers WSA Co’s work on the earthworks and construction of the airport (runway and terminal infrastructure) in accordance with the conditions of the project deed agreed by the Australian Government and WSA Co. Bulk earthworks to prepare the airport site for stage one construction commenced in early 2020.

        Summary of financial performance

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

        Table 5.10.30:  Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        364.3

        252.9

        Total revenue

        0.9

        0.9

        Income tax benefit

        Income/(loss) for the year/period

        (363.5)

        (252.0)

        Total other comprehensive income

        Total comprehensive income/(loss)

        (363.5)

        (252.0)

        Total assets

        295.5

        117.9

        Total liabilities

        91.7

        55.8

        Total equity

        203.8

        62.1

           

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

        5.10.113 Total expenses increased as a result of increased site preparation activity, primarily earthworks, of $90.5m and $12.3m of expenses related to site decontamination.

        5.10.114 The total comprehensive loss reflects the nature of funding available to WSA Co. WSA Co has entered into an equity subscription agreement with the Commonwealth to fund the development and construction of the airport to meet the Commonwealth’s functional specifications. During 2019–20 WSA Co received $405.5 million of this funding from the Commonwealth. These funds are recorded as share capital and were not recognised in the statement of comprehensive income.

        5.10.115 The increase in total assets of $177.6 million is mainly due to increases in:

        • the capitalisation of assets under construction in accordance with WSA Co’s capitalisation policy. During 2019–20 significant construction and earthworks commenced on the airport site resulting in higher levels of expenditure and capitalisation of work in progress ($129.5 million); and
        • an equivalent increase in the balance of cash drawn and held in the WSA Co bank account (funded by the equity subscription agreement) to allow for additional working capital for the payment of larger invoices associated with increased activity and volume of earthworks and other construction activities ($38.5 million).

        5.10.116 The increase in total liabilities mainly relates to the provision for decontamination of the airport site. WSA Co have recognised a provision for remediation equal to the estimated expenses that will be incurred in performing required remediation activities at the airport site (mainly asbestos contamination from earlier land use).

        Key areas of financial statements risk

        5.10.117 The ANAO completed appropriate audit procedures on all material items. The ANAO focuses 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 5.10.31. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.10.31:  Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Assets under construction

        $162.8 million

        supplier expenses

        $300.8 million

        Recognition of capital work in progress for airport construction activities

        Higher

        • judgement and estimation required by WSA Co in apportioning capital and operating costs across the whole of term construction of the airport given the nature of the project and method of project delivery; and
        • quantum of expenditure and attribution of expenditure that will be incurred in the construction of the airport.

        Decontamination provision

        $50.3 million

        decontamination expenses

        $37.0 million

        Recognition of provision for decontamination of airport land

        Moderate

        • recognition of decontamination provisions is inherently complex and subject to a higher level of judgments and estimates relating to future costs and the actual level of contamination of land.

        Multiple financial statement line items.

        Procurement policies and processes

        Moderate

        • weaknesses in procurement and contract management processes can increase the risk of unapproved expenditure or budgeted cost overruns being incurred by WSA Co.
            

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

        Audit results

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

        5.11 Parliamentary Departments

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Yes

        Moderate

        22 Sept 20

        22 Sept 20

             

        Portfolio overview

        5.11.1 The Parliamentary Departments support the operation of the Parliament of Australia, its committees and members. There are four parliamentary entities: the Department of Parliamentary Services; the Department of the Senate; the Department of the House of Representatives; and the Parliamentary Budget Office.

        5.11.2 Figure 5.11.1 shows the Parliamentary Departments’ income, expenses, assets and liabilities.

        Figure 5.11.1:  Parliamentary Departments’ income, expenses, assets and liabilities

        Figure 5.11.1 shows the Parliamentary Department portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.11.3 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 Parliamentary Departments.

        Table 5.11.1: The number of audit differences for entities in the Parliamentary Departments

         

        2019–20

        2018–19

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of Parliamentary Services

        1

        1

        2

        Department of the Senate

        2

        2

        Parliamentary Budget Office

        1

        1

        1

        1

               

        Source: Audit differences reported to entities in the Parliamentary Departments.

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

        Department of Parliamentary Services

        5.11.5 The Department of Parliamentary Services (DPS) is responsible for supporting the Parliament through the provision of a range of services, including library, Hansard, broadcasting, telecommunications, building security and maintenance.

        Summary of financial performance

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

        5.11.7 Changes introduced in response to the COVID-19 pandemic have impacted DPS operations in the following ways:

        • reduction in revenue due to the closure of Australian Parliament House (APH) resulting in lower than anticipated catering and events functions. There was also a reduction in related supplier costs;
        • increase in Information and Communication Technology (ICT) supplier costs due to transition to increased functionality for a remote working environment; and
        • increase in APH cleaning costs.

        Table 5.11.2: Key departmental financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (155.3)

        (148.5)

        Revenue from government

        124.7

        126.3

        Surplus/(deficit) attributable to the Australian Government

        (30.7)

        (22.1)

        Total other comprehensive income/(loss)

        (0.2)

        0.4

        Total comprehensive income/(loss) attributable to the Australian Government

        (30.9)

        (21.7)

        Total assets

        123.0

        132.0

        Total liabilities

        36.8

        32.0

        Total equity

        86.2

        100.0

           

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

        5.11.8 Net cost of services has increased due to reduced revenue as a result of the closure of Australian Parliament House (APH) resulting in lower than anticipated catering and events functions, increase in Information and Communication Technology (ICT) supplier costs due to transition to increased functionality for a remote working environment; and an increase in APH cleaning costs.

        5.11.9 The decrease in total assets is mainly due to continued depreciation of non-financial assets. All other fluctuations in balances reflect normal business activities.

        Table 5.11.3: Key administered financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Total expenses

        53.1

        50.9

        Total income

        5.5

        0.0

        Surplus/(deficit)

        (47.6)

        (50.9)

        Total other comprehensive income/(loss)

        25.2

        88.0

        Total comprehensive income/(loss)

        (22.4)

        37.1

        Total assets administered on behalf of Government

        2,668.0

        2,596.2

        Total liabilities administered on behalf of Government

        19.6

        5.8

        Net assets/(liabilities)

        2,648.4

        2,590.3

           

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

        5.11.10 Total income increased during 2019–20 as an artwork piece was reclassified from asset held in trust to heritage and cultural assets. In addition, DPS undertook an asset valuation during 2019–20 that resulted in an increment for buildings and other plant and equipment of $25.0 million against an increase of $88.0 million in the prior year.

        Key areas of financial statements risk

        5.11.11 The ANAO undertakes appropriate audit procedures on all material items and focusses 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 5.11.4, and is considered a Key Audit Matters (KAM) by the ANAO.

        Table 5.11.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Administered

        non-financial assets (excluding intangibles)

        $2.6 billion

        Valuation of non-financial assets

        KAM

        Higher

         

        • the unique nature of Parliament House, its contents and the purpose of the land, increases the judgement applied and complexity in establishing a fair value.
            

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

        Audit results

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

        5.12 Prime Minister and Cabinet portfolio

        Reporting entity

        Material entity

        Audit risk rating

        Type of auditor’s report

        Date financial statements signed

        Date auditor’s report issued

        Audit findings identified

        Department of the Prime Minister and Cabinet

        Yes

        Moderate

        21 Sep 20

        22 Sep 20

        Nil

        National Indigenous Australians Agency

        Yes

        Moderate

        7 Sep 20

        8 Sep 20

        Nil

        Indigenous Business Australia

        Yes

        Moderate

        2 Nov 20

        2 Nov 20

        Nil

        Indigenous Land and Sea Corporation

        Yes

        Moderate

        E

        25 Sep 20

        28 Sep 20

        Nil

        Aboriginal Hostels Limited

        No

        Moderate

        13 Nov 20

        17 Nov 20

        Kakadu Tourism (GLC) Pty Ltd

        No

        Moderate

        23 Sept 20

        30 Sept 20

        Northern Land Council

        No

        Moderate

        L

        National Australia Day Council Ltd

        No

        Low

        Q

        27 Oct 20

        27 Oct 20

        Nil

        Voyages Indigenous Tourism Australia Pty Ltd

        Yes

        High

        E

        17 Sep 20

        18 Sep 20

        Nil

               

        Portfolio overview

        5.12.1 The Prime Minister and Cabinet portfolio is responsible for providing support and policy advice to the Prime Minister, the Cabinet and ministers on public and government administration matters, including policy development and whole-of-government coordination, and providing services to Indigenous Australians.

        5.12.2 The Department of the Prime Minister and Cabinet (PM&C) is the lead entity in the portfolio. The department’s key purposes in 2019–20 were: to support the Prime Minister as the head of the Australian Government and the Cabinet and to provide advice on major domestic policy and international national security matters. The department also supported the National COVID-19 Co-ordination Commission and the National Bushfire Recovery Agency.

        5.12.3 Figure 5.12.1 shows the Prime Minister and Cabinet portfolio’s income, expenses, assets and liabilities.

        Figure 5.12.1: Prime Minister and Cabinet portfolio’s income, expenses, assets and liabilities

        Figure 5.12.1 shows the Prime Minister and Cabinet portfolio income, expenses, assets and liabilities in 2019-20.

        Source: 2019–20 CFS.

        5.12.4 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 entities, within the Prime Minister and Cabinet portfolio, that had audit differences.

        Table 5.12.1: The number of audit differences for entities in the Prime Minister and Cabinet portfolio

         

        2019–20

        2018–19

         

        Unadjusted

        Adjusted

        Total

        Unadjusted

        Adjusted

        Total

        Department of the Prime Minister and Cabinet

        1

        1

        2

        3

        3

        Aboriginals Benefit Account

        1

        1

        Aboriginal Hostels Limited

        1

        1

        2

        2

        2

        Anindilyakwa Land Council

        1

        1

        1

        1

        Australian Institute of Aboriginal and Torres Strait Islander Studies

        1

        1

        1

        1

        2

        Australian Public Service Commission

        1

        2

        3

        Central Land Council

        1

        1

        2

        1

        1

        Indigenous Land and Sea Corporation

        1

        8

        9

        1

        1

        Indigenous Business Australia

        1

        1

        - IBA Retail Property Trust

        1

        1

        - Ikara Wilpena Enterprises Pty Ltd

        4

        4

        - Indigenous Real Estate Investment Trusta

        2

        2

        - Tennant Creek Foodbarn Partnership

        2

        2

        - Tennant Creek Land Holding Trusta

        1

        1

        - Wilpena Pound Aerodrome Services Pty Ltda

        1

        1

        - Primary Partners Pty Ltd

        1

        1

        - National Centre of Indigenous Excellence Ltd

        1

        1

        - Voyages Indigenous Tourism Australia Pty Ltd

        2

        2

        2

        2

        National Australia Day Council Ltd

        1

        1

        National Indigenous Australians Agency

        1

        2

        3

        Northern Land Councila

        3

        3

        6

        Office of National Intelligence

        1

        1

        Old Parliament House

        1

        1

        2

        2

        Outback Stores Pty Ltd

        2

        2

        1

        1

        Tiwi Land Council

        1

        1

        Torres Strait Regional Authority

        3

        3

        2

        2

        Workplace Gender Equality Agency

        1

        1

        Wreck Bay Aboriginal Community Council

        1

        1

        1

        1

               

        Note a: As at the 24 November 2020 the financial statements audits were not finalised.

        Source: Audit differences reported to entities in the Prime Minister and Cabinet portfolio.

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

        Department of the Prime Minister and Cabinet

        5.12.6 The Department of the Prime Minister and Cabinet (PM&C) is responsible for coordinating policy development across government in economic, domestic and international affairs; and for public service stewardship.

        5.12.7 On 1 July 2019, the National Indigenous Australians Agency (NIAA) was created as an executive agency within the Prime Minister and Cabinet portfolio. NIAA assumed the lead role for Commonwealth policy development, program design, implementation and service delivery for Aboriginal and Torres Strait Islander peoples.

        5.12.8 Consistent with the Australian Government’s response to the COVID-19 pandemic, the Department of the Prime Minister and Cabinet has hosted the National COVID-19 Commission Advisory Board (formerly the National COVID-19 Co-ordination Commission) since its announcement on 25 March 2020. The Board coordinates advice to the Australian Government on actions to anticipate and mitigate the economic and social impacts of the global COVID-19 pandemic. The activities of the Board are funded from the appropriations to the Department.

        Summary of financial performance

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

        Table 5.12.2: Key departmental financial statements items

        Key departmental financial statement items

        2019–20

        (m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (178.3)

        (431.8)

        Revenue from government

        165.4

        404.9

        Surplus/(deficit) attributable to the Australian Government

        (13.0)

        (26.9)

        Total other comprehensive income

        0.5

        2.8

        Total comprehensive income/(loss) attributable to the Australian Government

        (12.4)

        (24.1)

        Total assets

        235.8

        262.0

        Total liabilities

        174.4

        149.0

        Total equity

        61.4

        113.0

           

        Source: PM&C’s audited financial statements for the year ended 30 June 2020.

        5.12.10 On 1 July 2019 the Indigenous Advancement function transferred to the newly created NIAA as a result approximately half of the former PM&C staff and Regional Network staff were transferred to NIAA which contributed to the overall reduction in the net cost of services of $253.5 million.

        5.12.11 Revenue from government decreased by $239.5 million as a result of the reduction in PM&C appropriations to reflect the transfer of staff and its Regional Network to NIAA on 1 July 2019.

        5.12.12 The movement in assets mainly reflects the transfer of $140.0 million of assets to NIAA and the recognition of $116.6 million right-of-use assets as required by AASB 16. The increase in liabilities mainly reflects the $66.8 million transfer of employee leave provisions and other liabilities to NIAA and the $119.5 million recognition of lease liabilities as required by AASB 16.

        Table 5.12.3: Key administered financial statements items

        Key administered financial statement items

        2019–20

        (m)

        2018–19

        ($m)

        Total expenses

        146.4

        1,705.6

        Total income

        0.7

        78.4

        Surplus/(deficit)

        (145.7)

        (1,627.2)

        Total other comprehensive income/(loss)

        26.0

        89.9

        Total comprehensive income/(loss)

        (119.7)

        (1,537.3)

        Total assets administered on behalf of Government

        2,650.3

        3,619.7

        Total liabilities administered on behalf of Government

        20.7

        54.8

        Net assets/(liabilities)

        2,629.6

        3,564.8

           

        Source: PM&C’s audited financial statements for the year ended 30 June 2020.

        5.12.13 Total expenses decreased due to the transfer of the Indigenous function to NIAA on 1 July 2019. As part of this transfer, NIAA is now responsible for grants and payments to Aboriginal Land Councils and the Indigenous Land and Sea Corporation. Total expenditure on those grants and payment in 2018–19 was $1,524.5 million. Total expenses for PM&C in 2019–20 mainly related to the payment of grants to Commonwealth entities and companies in the PM&C Portfolio.

        5.12.14 Total income and total assets reduced as the investments of the Aboriginals Benefit Account transferred to NIAA on 1 July 2019. Consequently interest on those investments is now earned by NIAA instead of PM&C.

        Key areas of financial statements risk

        5.12.15 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 PM&C’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 5.12.4, including the areas which were considered a Key Audit Matter (KAM) by the ANAO. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.12.4: Key area of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Departmental

        Asset $140.7m

        Liabilities $66.8m

        Administered

        Assets $82.5m

        Liabilities $35.0m

        Existence, completeness and valuation of assets and liabilities transferred to the National Indigenous Australians Agency

        KAM

        Moderate

        • the transfer of a significant portion of PM&C assets and liabilities to NIAA creates the risks that not all assets or liabilities are correctly identified or are transferred at the wrong amounts.

        Administered

        investments in Commonwealth entities

        $2.6 billion

         

        Valuation of investments

        KAM

        Moderate

        • appropriateness of the selection of valuation techniques and underlying assumptions applied by PM&C to determine fair value for investments in Commonwealth entities.
            

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

        Audit results

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

        Indigenous Business Australia

        5.12.17 Under its enabling legislation, the Aboriginal and Torres Strait Islander Act 2005, Indigenous Business Australia’s (IBA’s) purposes are to assist and enhance Aboriginal and Torres Strait Islander self-management and economic self-sufficiency; and to advance the commercial and economic interests of Aboriginal and Torres Strait Islander peoples by accumulating and using a substantial capital base for their benefit. IBA has 22 actively trading subsidiaries, which are audited by the ANAO.

        Summary of financial performance

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

        Table 5.12.5: Key financial statements items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        20.8

        33.3

        Revenue from government

        9.5

        9.7

        Surplus/(deficit) before income tax on continuing operations

        30.3

        43.0

        Surplus/(deficit) attributable to non-controlling interest

        30.3

        13.6

        Surplus/(deficit) attributable to the Australian Government

        30.0

        29.4

        Total other comprehensive income/(loss)

        (1.0)

        (0.9)

        Total comprehensive income/(loss) attributable to the Australian Government

        29.0

        28.5

        Total assets

        1,684.5

        1,570.3

        Total liabilities

        132.0

        76.6

        Total equity

        1,552.5

        1,493.7

           

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

        5.12.19 Net contribution by services decreased as a result an increase in supplier expenses of $8.7 million due to the acquisition of the Tennant Creek BP Service Station; which also increased depreciation and amortisation expenses of $3.1 million and a $7.3 million increase in write-down and impairment of assets. This was offset by an increase in own source revenue of $7.1 million due to additional operational revenue from the service station.

        5.12.20 Total assets increased due to an increase of $16.9 million for land and buildings as a result of initial recognition of AASB 16; $31.7m increase in investment properties; an increase in cash held of $23.0 million due to the funds relating to loan settlements and increases in home and enterprise loans of $53.0 million.

        5.12.21 Total liabilities increased by $55.5 million due to $25.0 million borrowing by a subsidiary acquired for a new acquisition, initial recognition of interest bearing liabilities of $13.3 million under AASB 16 and payables of $20.8 million that includes funds held for the COVID-19 financial support package.

        Key areas of financial statements risk

        5.12.22 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 IBA’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 5.12.6. No significant or moderate audit findings were identified relating to these key areas of risk.

        Table 5.12.6: Key areas of financial statements risk

        Relevant financial statement item

        Key area of risk

        Audit risk rating

        Factors contributing to the risk assessment

        Loans – Home Ownership Program

        $967.0 million

        Loans – Business Development and Assistance Program

        $28.4 million

        Valuation of loan portfolio – implementing amortised cost under AASB 9

        Moderate

        • fair value calculations are based on a combination of variable market inputs and internally generated estimates and judgements;
        • the fair value methodology is complex and requires regular review to ensure continued reliability;
        • application of an amortised cost basis after initial recognition requires the development of new processes and systems within IBA to accurately calculate and recognise loan balances under the requirements of AASB 9; and
        • the initial adoption of changes under AASB 9 require adjustment to the opening balance sheet and additional explanatory disclosures.

        Loans – Home Ownership Program

        $967.0 million

        Loans – Business Development and Assistance Program

        $28.4 million

        Valuation of loan portfolio – implementing expected credit losses under AASB 9

        Moderate

        • change in recognition criteria for loans impairment under AASB 9 requires the development of a new methodology to estimate expected credit losses which requires the use of judgements and estimates; and
        • expected credit losses will need to be recognised on inception of loans receivable, it is expected that the initial adoption of AASB 9 will require adjustment to the opening balance sheet and additional explanatory disclosures.

        Loans – Home Ownership Program

        $967.0 million

        Loans – Business Development and Assistance Program

        $28.4 million

        Valuation of loan portfolio – change in loan discount rates

        Moderate

        • judgement applied in setting the discount rate used in the present-value calculation of loans receivable on inception, which is a key input;
        • the new approach to calculating the discount rate is underpinned by significant assumptions and analysis, including using actual internal experience, comparing IBA’s expected losses in the standard variable rate benchmark for major industry financial institutions; and
        • reliability and completeness of the IBA’s own credit risk history underpins the risk weightings and credit risk margin; and

        Investment property

        $166.4 million

        Property, plant and equipment

        $20.3 million

        Valuation of investments

        Moderate

        • fair value calculation includes forecast earnings and capitalisation rates derived for regional areas, which are subject to judgement;
        • complex accounting requirements associated with investments in associate entities and assessment of impairment and gains on revaluation; and
        • unaudited management accounts are used for valuation of unlisted investments in associated entities.
            

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

        Audit results

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

        Indigenous Land and Sea Corporation

        5.12.24 The Indigenous Land and Sea Corporation’s (ILSC’s) purpose is to assist Aboriginal and Torres Strait Islander people to acquire and manage land so as to provide economic, environmental, social and cultural benefits; and to provide land management assistance to support the delivery of sustainable benefits from land acquisition. The ILSC’s purpose also includes investing in water-based projects to generate social, cultural, environmental and economic opportunities that land and water ownership can bring to Indigenous Australians.

        Summary of financial performance

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

        Table 5.12.7: Key financial statement items

        Key financial statement items

        2019–20

        ($m)

        2018–19

        ($m)

        Net (cost of)/contribution by services

        (56.3)

        (42.4)

        Revenue from government

        62.7

        62.0

        Surplus/(deficit) before income tax attributable to the Government

        6.4

        19.5

        Income tax expenses/(benefit)

        1.4

        6.7

        Surplus/(deficit) attributed to the Government

        5.0

        12.8

        Total other comprehensive income/(loss)

        (35.8)

        13.4

        Total comprehensive income/(loss) attributable to the Australian Government

        (30.8)

        26.2

        Total assets

        809.8

        875.5

        Total liabilities

        361.3

        397.2

        Total equity

        448.5

        478.3

           

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

        5.12.26 The COVID-19 pandemic has impacted on ILSC’s operations and underlying result for 2019–20. Areas that were particularly affected were the operations of subsidiaries Voyages Indigenous Tourism Australia Pty Ltd and the National Centre of Indigenous Excellence Ltd who reported reductions in revenue with corresponding decreases in expenditure throughout the period. The impact is expected to be temporary, however the recovery period remains uncertain.

        5.12.27 The increase in net cost of services and decrease in surplus before income tax is largely attributable to a decrease in revenue of the subsidiary, Voyages Indigenous Tourism Australia Pty Ltd (Voyages), and an increase in the provision of grant funding to indigenous groups, in line with the objectives of ILSC. This is slightly offset by a decrease in expenditure related t