The purpose of Insights: Audit Opinion is to provide the Auditor-General's views on key issues facing the Australian public sector. This inaugural edition is on the topic of the Commonwealth Performance Framework and how it can be better used to drive effectiveness in the Australian public sector. This includes the need to prioritise the improvement of performance frameworks, embed a performance culture and use performance information to drive business improvement.

Introduction

The Public Governance, Performance and Accountability Act 2013 (PGPA Act) established a framework for planning, management and reporting of public sector activity. It recognised that performance of the public sector is more than financial, introducing a framework for measuring and assessing performance, including requiring effective monitoring and evaluation.

The Commonwealth Performance Framework, developed under the PGPA Act, requires entities to set out what they plan to achieve, how they will achieve it and what success looks like. Good quality performance reporting enables the Parliament and the public to assess whether entities deliver the outcomes for which they are funded. That is, it provides the basis on which accountable authorities can be held to account. In addition, information on entities’ achievement of outcomes provides parliament and government with a basis for future investment and policy decisions.

Accountable authorities of Commonwealth entities have a legislative duty to promote the achievement of the purposes of their entity, and are required to prepare annual performance statements that provide information about their entity’s performance in achieving its purposes. Commonwealth entities have been required to produce annual performance statements since 1 July 2015.

While previous frameworks had required performance reporting in annual reports, they proved unable to effectively influence the performance culture within the public sector and form a stable basis to embed strategic planning and transparent and meaningful reporting. The PGPA Act may create an effective system for improving the performance of government policies and programs and strengthen accountability and transparency through meaningful performance reporting by Commonwealth entities. This would be driven by the PGPA Act and Rule, requiring annual performance statements with minimum standards to be prepared by Commonwealth entities —based on annual corporate plans — which can be independently audited by the ANAO. This had not been required under previous frameworks.

The PGPA Act requires the Minister for Finance or responsible Minister to request the ANAO to conduct a performance statements audit. The Joint Committee of Public Accounts and Audit has recommended annual performance statements audits be made a mandatory function of the ANAO.

Prioritise the improvement to performance frameworks

My mid-term report, published in October 2020, stated that substantial improvements were needed before reported performance information could be fully relied upon. While there have been some improvements observed since, my view has not significantly changed.

There has been progress in aspects of performance measurement and reporting by the entities subject to a performance statements audit — including improved governance and preparation processes — but improvement across all entities has not been consistent. Also, the overall rate of improvement could have been faster, given the key role that performance measurement plays in both the quality of decision-making and accountability to the Parliament and the government.

A key failing is that entities have not implemented enterprise-wide performance frameworks. The primary focus of most entities has been on meeting minimum compliance requirements, rather than seeing high-quality performance information as a strategic asset that can help determine if they are achieving their objectives, making the best possible use of their resources and providing strategic advice to inform government policy and investment decisions.

At its simplest, a performance framework is the means by which an entity can see how it is performing against its objectives. It is a key tool for strategic planning because it requires a clear articulation of what the entity is trying to achieve and how success will be measured and assessed.

The performance framework is also what drives behaviour and business planning in an entity – ‘what gets measured gets done’. Observations from our audit work over many years suggests that accountable authorities across government can often lack the performance data they need for effective oversight of their entities, which weakens their ability to effectively monitor the performance of government policies and programs, hold senior leaders to account and intervene effectively where required. For example, only some departments are reporting performance information about their policy advice functions, even though it is a key function of all departments.

To be effective the performance framework cannot be an afterthought — a compliance exercise undertaken after strategic and business planning. It needs to be prioritised as an integral part of this planning. In June, the ANAO published an edition of Insights: Audit Lessons to share lessons from our audits of performance statements. It provides key insights and lessons to assist entities to improve their performance measurement and reporting.

Embed a performance culture

The PGPA Act changed stewardship and accountability arrangements for entities. It sought to create momentum for change, whereby performance information becomes valued and is seen by entities as essential to good management and demonstrates the proper use of public resources, to the same degree as financial information.

Strategic and concerted leadership from the top is needed to ensure that performance information is embedded into an entity’s operations and culture. If the accountable authority and other senior leaders do not value — or do not appear to value — performance information, the entity is unlikely to realise the benefits that flow from information about performance.

The evidence is that not all Commonwealth entities value performance information to the same degree as financial information. Unlike for financial information — where strong governance and regular executive monitoring is well established — there is a lack of governance mechanisms and regular monitoring and review of performance information at the executive level. Regular reporting of performance measures could provide early warning and facilitate a timely management response.

ANAO audits often find a lack of performance assessment and program evaluation. Where arrangements are in place, the wrong things are often being measured, results cannot be relied on, or performance information is not used. Performance measurement and reporting should be closely related to policy and program development processes. Our audits have often found limited evidence that entity performance measures are structured around clear, well-evidenced business and logic models.

Where leadership is strong, performance reporting obtains a profile that encourages senior leaders to focus on performance improvement and results. If leaders are held accountable to agreed and transparent performance expectations, there is a better chance that key activities, outputs and outcomes will be successfully delivered.

For this to occur there needs to be strong incentives for accountable authorities to embed a performance culture. Auditing of performance statements — like auditing of financial statements — is an important component of these incentives.

Use performance information to drive business improvement

Performance information is of most value if it is used to assess whether an entity’s purposes are being met, and to provide a mechanism through which improvements can be made. In addition to improving performance, well constructed and complete performance information can have an impact on improving productivity, policy and program implementation, integrity and innovation.

For the public sector, where the focus is generally on the impact achieved and its cost, financial statements only report part of the information necessary to see how well resources have been used in the delivery of government policies, programs and services. Performance information is an essential tool to understand whether entities are operating effectively and achieving a return on the government’s investment. In this context it is surprising when entities indicate that it is too difficult for them to identify and assess their outcomes and the impact of their programs and services.

Entities need to be able to determine what types of measures are most appropriate for measuring and assessing performance in achieving their purposes and whether, in combination, they are adequate to reflect achievement of the entity’s purposes and key activities. In this regard, an accountable authority has a legal responsibility to develop a corporate plan for their entity that clearly sets out the purposes of the entity, the key activities to achieve the purposes and how success will be measured.

The PGPA Act introduced the uniform requirement for corporate planning to enhance financial and strategic planning by entities. It is concerning when audits observe that performance measures reported in entity performance statements are not regularly monitored as they are not used for internal management — not because external performance information should drive internal management, but because external information should be a reflection of the management and performance of the entity.

It was pleasing to see that during the 2022–23 reporting period, most of the entities subject to ANAO performance statements audits improved their processes for periodic internal monitoring of performance information. Moreover, our sector engagement shows that some entities not yet subject to audit are investing to improve the quality of information presented in performance statements. Using performance information within an entity should be a standard management practice.

Conclusion

The PGPA Act fundamentally changed the way public sector entities are to be governed. Requirements for performance measurement and reporting are critical to accountability and the achievement of purposes. In my view, based on audit results, accountable authorities need to prioritise the improvement of performance frameworks, embed a performance culture and use performance information to drive business improvement. While these statements may seem obvious, the evidence is that more needs to be done to ensure that the standards and expectations for performance reporting meet the requirements of the Parliament and the public.

The ANAO supports the steps being taken by entities to improve their performance reporting and encourage ongoing investment to build capability and capacity. It is also clear that accountability is a key driver for these improvements, and a major source of accountability is the assurance that the Parliament can receive from the auditing of performance statements by the ANAO.

In contrast to financial statements auditing, performance statements auditing is in its infancy. The ANAO methodology for auditing performance statements will continue to evolve as the audit program expands. We will work closely with the sector to refine the methodology to ensure it appropriately incentivises entities to produce meaningful performance information, rather than taking the path of least resistance to avoid potential audit findings.

The Department of Finance also has an important role in ensuring that improvements to performance measurement and reporting are prioritised and that momentum is maintained. In doing this it needs to carefully balance the conflicts it has as both the standard setter and being part of the sector that the standards apply to.

There remains significant risk to manage if the PGPA Act reforms are to sustain and improve entity performance in an enduring way, where previous reforms did not. Performance statements may ultimately fail to make a lasting impact on departmental and whole-of-government performance if they are seen as primarily a compliance exercise, rather than a strategic tool for improving policies, programs and entity outcomes and strengthening accountability and transparency.