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A Financial Management Framework to Support Managers in the Department of Health and Ageing
The audit objective was to examine whether Health's financial management framework and processes adequately support Health's Secretary, Executive and managers to make informed decisions on the use of Commonwealth resources.
Over the last 20 years, the Australian Government has reformed financial management in the Commonwealth public sector in order to improve performance, stewardship and accountability. Legislation places responsibility for the efficient, effective and ethical use of resources with the Chief Executive Officers (CEOs) of departments and agencies. In order to discharge their responsibilities, they need to ensure that their organisations have a level of financial management that assists their managers to use resources efficiently and effectively. This audit examines the Department of Health and Ageing's (Health's) response to these requirements.
Health is the lead agency in the Health and Ageing Portfolio. The 2005–06 Commonwealth Budget provided $39.5 billion1 for the Portfolio, making it the second largest. The budget for the department was $38.7 billion of administered funds and $457 million of departmental funds.2
The audit objective was to examine whether Health's financial management framework and processes adequately support Health's Secretary, Executive and managers to make informed decisions on the use of Commonwealth resources. To form the opinion, the ANAO examined whether Health's:
- financial management framework, systems and reports are adequate to assist managers to efficiently and effectively manage the resources for which they are responsible;
- internal control adequately contributes to the assurance provided to the Secretary that the resources allocated to Health are managed efficiently and effectively; and
- approach to strategic financial management provides adequate assurance to Health's Secretary and Executive that Health will have the resources and capabilities required to meet future challenges.
The audit considers the measures used by Health to ensure that its managers have appropriate financial management skills and knowledge to inform their judgements on the efficient and effective allocation of resources.
The audit does not comment on Health's finances and is not designed to provide an opinion on Health's financial performance or position. The latter is done through Health's annual financial statements. The audit takes into account and builds on the ANAO's work and opinion on the department's financial statements.
Financial Management Framework (Chapter 2)
Health's financial management framework provides a sound structure for the attainment of its objectives.
Health has established a financial management framework that covers governance, financial processes, procedures and controls. Health has identified its financial management responsibilities, which are communicated to staff through Chief Executive's Instructions (CEIs), procedural rules and financial delegations. Both the CEIs and financial delegations have recently been reviewed, while procedural rules were, at the time of audit fieldwork, being revised.
At the time of audit fieldwork, Health's risk management framework needed further development before it could be assessed as providing sound support for financial management in the department.
ANAO fieldwork found that Health had introduced consistent business planning processes, including risk assessment and risk responses, in all business units. However, these activities were not complemented by a department-wide risk management assessment and plan. Without a department-wide risk assessment Health's Secretary, Executive and Audit Committee will have had difficulty in obtaining assurance that strategies and activities (including internal control) adequately address the risks Health faces. Similarly, there will only be limited assurance that Health's strategic financial plans are sound.
Health is working to introduce, from June 2005, an integrated department-wide approach to risk management.
ANAO examination of Health's planned approach has led to the conclusion that it will provide adequate support for financial management, if operated effectively.
Relevant, Reliable and Timely Financial Data (Chapter 3)
The financial data provided to senior managers is relevant. However, programme managers who are not division heads are not provided with information at programme level on the departmental funds for which they are responsible.
Health's chart of accounts for departmental funds is not aligned with programme budgets. As a result, at the time of audit fieldwork, Health could not provide many programme managers with reports showing both administered and departmental expenditure for programmes they administered. Health has advised that, in July 2005, it will introduce a chart of accounts for departmental funds that is aligned with programmes. This follows the introduction on 1 July 2004 of a chart of accounts for administered funds aligned with programmes.
Health has established performance indicators against all programme activities. However, non-financial data is generally not recorded in the Financial Management Information System (FMIS)3 or in information systems that are integrated with it.
Health's FMIS generally provides information that managers can rely on to meet their financial management responsibilities. However, some information on commitments and liabilities for administered funds can only be obtained from programme administration systems.
The ANAO audit of Health's financial statements for 2003–04 found that, for the purpose of preparing the financial statements:
- expenditure and revenue records are reliable;
- assets records are reliable; and
- records of commitments and liabilities for administered appropriations are incomplete but are improving as Health improves its programme administration systems and integrates them more closely with its FMIS.
Discussions with managers and staff indicated that Divisions, Branches, Sections and State Offices typically believe they can rely on the transactions recorded in the FMIS. A common theme amongst managers was that, while in the past they had maintained shadow systems4, they now used data from the FMIS.
The timeliness of Health's internal financial reports, while capable of improvement, is acceptable.
A standard financial report is delivered to all Senior Executive Service (SES) officers in the department within six days of the end of the month. This compares with a suggested benchmark of two to three working days after the end of the month. The ANAO considers that the timeliness of Health's financial reports is such that improving the relevance and presentation of reports is a higher priority.
Health's reporting to managers has improved significantly over the last two years.
Health has consulted widely amongst its managers on the content and format of reports from its FMIS. It has used this information to develop a range of standard financial reports. It has also initiated a major project to review procedures and guidelines and introduced a common business model across the department. Another initiative is a project to develop a Data Warehouse. 4
Financial Management Skills, Training and Support (Chapter 4)
Health's senior managers and central finance staff have the knowledge and experience to use financial data.
Senior managers interviewed, including the Executive, Division Heads and State Managers, were found to have appropriate financial management knowledge and experience.
The ANAO has assessed Health as having a Finance Branch with qualified and experienced financial staff.
The financial management knowledge and experience of less senior divisional staff interviewed were also appropriate. However, there was evidence that the knowledge of some staff required further improvement.
Observations from several sources paint a consistent picture of an organisation with an uneven spread of financial knowledge and experience. There are staff who are fully aware of their financial management responsibilities and who have appropriate knowledge and experience. On the other hand, there are some staff who need further training to improve awareness of their financial management responsibilities and to improve their knowledge.
Health provides a range of financial training to staff at all levels.
In the last 12 months, topics covered by financial training have included delegations, contract management and procurement, accrual accounting, the use of spreadsheets, and the FMIS. Health has developed two financial management and accountability courses, the Diploma of Government (Financial Management) and ‘Discovering Clerkliness', to improve the financial management skills of its staff.
Health managers and staff are provided with comprehensive financial support services.
The department's managers and staff have access to, and use, a range of financial support services, including the Finance Branch Help Desk, the FinNet intranet site5, the procedural rules, the Finance Staff User Group and officers designated as experts for queries on specific issues.
Internal Control (Chapter 5)
Overall, Health's internal control provides an adequate contribution to the assurance provided to Health's Secretary and Executive on the effective and efficient use of resources. However, as mentioned earlier, Health's risk assessment processes did not provide adequate support for internal control at the time of audit fieldwork.
Lines of accountability are well established and there are continuing measures to ensure the competency of staff. Processes that provide assurance to Health's Secretary, Executive and Audit Committee are being strengthened. Examples are the introduction of Control Self Assessment (CSA) during 2003–04 and the planned introduction of a revised risk assessment process in June 2005.
There is clear and unambiguous support from Health's Secretary and Executive for strong internal control.
Consistent information from managers interviewed led the ANAO to conclude that Health's Secretary and Executive are playing a leading role in improving financial management in the department and in promoting a robust culture of stewardship and accountability.
Health has made good progress in developing an organisational culture of stewardship and accountability.
The ANAO concluded from the evidence examined that Health:
- is working to communicate and enforce integrity and ethical values;
- has a demonstrated commitment to financial management competence;
- has strong participation by those charged with governance; and
- is developing a management philosophy and operating style that values stewardship and accountability.
Health has made progress in rationalising its programme administration systems and in moving the processing of payments from these systems to its core FMIS.
This has lessened the effort required by Health to maintain the quality of its information systems, simplified its control procedures and increased their robustness.
Health's control activities are, on the whole, reliable for the production of financial statements.
The ANAO's interim audit of Health's financial statements for 2004–05 found only one issue (business continuity planning not yet completed) posing a moderate business or financial risk and no issues posing a significant risk.
Health has effective processes in place to monitor its controls.
The ANAO has assessed Health as having an effective Audit Committee and internal audit function. Health uses management representation letters to obtain assurance from business unit managers that the information they provide on their transactions during the year has been recorded in accordance with required standards and procedures and is materially correct.
Health has strengthened its ability to monitor its controls by introducing a CSA programme during 2003–04.
Internal control in Health would be strengthened by a clear link between Control Self Assessment and Health's risk assessment processes.
Without a link between CSA and Health's risk assessment process, Health's Audit Committee, Executive and Secretary will have difficulty in obtaining adequate assurance that Health's control activities are addressing all significant risks satisfactorily. This report includes a recommendation to address this finding.
Responsibility for Control Self Assessment should be moved from Internal Audit to Health's Business Group.
Health's Audit and Fraud Control Branch has developed and assisted with the implementation of CSA in the department. The ANAO suggests that responsibility for the process be moved to Business Group. This would allow Internal Audit to provide independent assurance to the Audit Committee and the Secretary on the effectiveness of the CSA process.
Strategic Financial Management (Chapter 6)
Health's approach to strategic financial management is, with the exception of the support provided by its risk management processes, adequate.
Health's analysis of the key factors affecting its current and future administered expenses assists it to ensure that it has the resources and capabilities to deliver to the community the services and results required by the Government and Parliament.
The department has established an improved planning process, begun to invest in the financial management skills of staff, established long-term strategies for its most significant assets (people, IT and property), and implemented a series of reforms that, when viewed collectively, demonstrate a strategic approach to financial management of departmental funds.
The introduction in June 2005 of revised risk assessment processes should complete Health's development of the components required for strategic financial management.
Health has produced a number of strategy documents, including the Financial Strategy 2004–05 to 2007–08.
Health's financial strategy addresses the factors affecting departmental expenses and builds on the recently implemented financial reforms.
Other strategic plans prepared by Health include:
- People Strategy 2004–07;
- Information Technology Strategy and Road Map; and
- Property Master Plan.
Health has medium and long-term financial plans and goals.
Health's financial plans and goals are publicly stated in the Portfolio Budget Statement for the Health Portfolio. Lower level plans and goals are set out in Division, State Office and Branch business plans. Health's strategy documents also contain strategic goals.
Health is monitoring progress against its medium and long-term financial strategies and plans.
The Secretary and Executive receive financial and performance data that allows them to develop and manage Health's financial plans.
Health is developing a Departmental Performance Report to assist senior management monitor progress against medium and long-term financial plans. The introduction, from 1 July 2005, of a chart of accounts for departmental funds aligned with programme budgets will also enhance the ability of senior management to monitor progress.
Overall audit conclusion
In the ANAO's opinion, Health's financial management systems and reports, internal control and strategic financial management have improved significantly in recent years, to the stage where, with the exception of two areas, they provide adequate support to Health's Secretary, Executive and managers in making informed decisions on the effective and efficient use of Commonwealth resources. This strengthening of the department's position has been achieved through ongoing executive attention to the fundamentals of governance and financial management.
While noting the improvements being made, the ANAO found that the lack of a department level risk assessment meant that Health's risk assessment and response processes did not provide adequate support for financial management. Further, the fact that Health's chart of accounts for departmental funds was not aligned with Health's budget structure meant programme managers were not fully supported in making informed decisions on the efficient and effective use of resources.
The ANAO further found that Health had recognised these deficiencies and was well advanced in action to remedy them. These actions are part of a programme of financial reform, in which Health's Secretary and Executive are playing a leading role. As part of the reform process, Health is working to develop a robust culture of stewardship and accountability.
In the ANAO's opinion, the introduction of a revised risk assessment and management process in June 2005 and the introduction of a chart of accounts for departmental funds aligned with Health's budget structure from 1 July 2005 should complete the foundations of a robust system to support Health's Secretary, Executive and managers in the efficient and effective use of resources.
The support provided to Health's managers by its financial management framework provides a sound basis for good financial management. However, the effective and efficient use of Commonwealth resources requires ongoing consideration of governance arrangements, coupled with managerial analysis of results, variations and other performance information to inform decisions in relation to the very significant programmes administered by the department.
The ANAO made one recommendation in this report, aimed at strengthening the department's internal control.
The department is supportive of this audit report and agrees with the recommendation.
1 Departmental items are those ‘assets, liabilities, revenues and expenses controlled by agencies in providing their outputs.' Administered items are those ‘assets, liabilities, revenues and expenses managed by agencies on behalf of the Commonwealth. Agencies do not control administered items.' Department of Finance and Administration web site, viewed 13 January 2005 <www.finance.gov.au>, Portfolio Budget Statements 2003–2004, Glossary and Acronyms.
2 In this audit the term ‘Financial Management Information System (FMIS)' is used to refer to Health's core accounting and financial management information system.
3 Managers keep shadow systems when they cannot rely on data from a core system or when the data is not available from the core system. These auxiliary systems ‘shadow' the core system. Better practice organisations do not have shadow systems.
4 A Data Warehouse is a collection of data from various sources gathered and organised so that it can easily be analysed, extracted, combined and otherwise used to further understand the data. Health's project aims to organise its separate information systems and databases to allow its data to be analysed and viewed more effectively: known in the terminology used by Health's FMIS as a ‘business warehouse'.
5 FinNet is a centralised site on Health's intranet for all financial management related information.