The objective of the audit was to examine the investment of public funds by selected entities, including: compliance with relevant legislation, delegations and instructions; the value for money of investment strategies; and reporting of investment activities. Six entities were selected for audit, comprising three FMA Act agencies and three Commonwealth authorities. The six entities had aggregrate investments of $1.64 billion as at 30 June 2004 and realised investment earnings of some $80.4 million during 2003/04.


  • Albury-Wodonga Development Corporation
  • Australian Broadcasting Corporation
  • Australian Customs Service
  • Australian Fisheries Management Authority
  • Australian National Maritime Museum
  • Australian National University
  • Australian Nuclear Science and Technology Organisation
  • Australian Pesticides and Veterinary Medicines Authority
  • Australian Prudential Regulation Authority
  • Australian Sports Commission
  • Australian Wheat Export
  • Australian Wine and Brandy Corporation
  • Cotton Research and Development Corporation
  • Department of Agriculture, Fisheries and Forestry
  • Department of Industry Tourism and Resources
  • Grape and Wine Research and Development Corporation
  • Health Insurance Commission
  • Northern Land Council



Commonwealth entities reported financial investments of some $20.205 billion1 as at 30 June 2004. For a small number of Commonwealth entities, investment of public funds is part of their core business. However, this is not the case for most investing entities. Nevertheless, in both circumstances, having regard to the attendant risks, it is important that investment of public funds be prudently managed in accordance with the legislative framework.

Investment activity involves a trade-off between risk and return.2 In this context, it is generally considered that the Commonwealth has a low tolerance for financial risk, which limits investment activity to low-risk assets.3 This is reflected in the legislative framework governing Commonwealth entities' investing activities. In particular:

  • not all entities are permitted to invest; and
  • for most entities, where investment is permitted, the types of authorised investments are generally very limited.

The Department of Finance and Administration (Finance) advised ANAO in November 2004 that, in the case of Financial Management and Accountability Act 1997 (FMA Act) agencies, the Parliament has authorised each class of investment, whereas for Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies the Parliament has authorised a limited number of investment classes and given the Treasurer the power to authorise additional investment classes. Finance further advised that the different levels of control exerted by the Parliament over the investments of entities under the FMA and CAC Acts affects the management and reporting of risk, and that responsibility for compliance and proper management under these Acts lies with Chief Executives of FMA Act agencies and directors of CAC Act bodies.

Audit approach and key findings

The objective of the audit was to examine the investment of public funds by selected entities, including:

  • compliance with relevant legislation, delegations and instructions;
  •  the value for money of investment strategies; and
  •  reporting of investment activities.

Six entities were selected for audit, comprising three FMA Act agencies4 and three Commonwealth authorities.5 The six entities had aggregate investments of $1.64 billion as at 30 June 2004 and realised investment earnings of some $80.4 million during 2003–04.

In addition to the specific entities selected for their investment activities, Finance and Treasury were included in the audit because of their responsibilities associated with the FMA Act and the CAC Act. ANAO also undertook a desk audit of other Commonwealth statutory authorities' investment activities, relying on the most current financial statement disclosures publicly available at the time of audit fieldwork.


In general, the types of investments that Commonwealth entities are authorised to acquire are identified in the relevant legislation governing their investing activities. There are three exceptions where enabling legislation for Commonwealth authorities specifically exempts them from the investment restrictions of the CAC Act.6

The only way authorised investments can be expanded for FMA Act agencies is through legislative change or changes to the regulations made by the Finance Minister under the FMA Act7 . For Commonwealth authorities, the CAC Act provides the Treasurer8 with the capacity to approve the investment of surplus moneys in a manner other than those specified in the Act. Although such approvals create additional legal rights for the relevant authority to invest its surplus money, ANAO found that records maintained by Treasury of these approvals were both inaccurate and incomplete. As well, ANAO found that documentation of such approvals was not always readily available from the entities that originally sought the approval.

Identified non-compliance

During the course of this performance audit, ANAO identified that, at least 11 entities,9 and up to 13 entities,10 have purchased and reported holding investments not authorised by the relevant legislation. In total, more than $566 million in unauthorised investments were identified.

There have been two main reasons for the purchase of non-compliant investments, as follows:

  • In a number of instances, entities' investment procedures and governance structures demonstrated insufficient regard for legislated investment restrictions. Among other things, this deficiency was reflected in documented investment strategies that included plans to purchase unauthorised investments and inadequate oversight of investment activities.
  • Some different views exist on what investments are, and are not, permitted by the CAC Act. For three Commonwealth authorities, these differing views have been informed by legal or financial advice they have obtained. These authorities did not seek the Treasurer's approval under subsection 18(3)(d) of the CAC Act for these investments.

In terms of the nature of the non-compliance, Treasury commented to ANAO in November 2004 that the type of investments undertaken by those entities that have not been complying with subsection 18(3) of the CAC Act are of relatively low risk.11 At the same time, Finance commented to the ANAO as follows:

The non-compliance, while not acceptable, should be viewed in context. Although there was some non-compliance, the investments were not, in many cases, necessarily of higher risk in comparison to other examples of compliant investments and the report did not identify any circumstances in which money was lost through securities defaulting.

It is clearly important that entities comply with restrictions legislated by the Parliament. In addition, where departures by Commonwealth authorities are seen as prudent, the legislation provides a means of obtaining appropriate approval from the Treasurer.

The non-compliance was particularly significant for two FMA Act agencies involved, as follows:

  • Notwithstanding the clear Parliamentary direction that the Fund's investments be limited to those authorised by legislation, and the steps taken to compensate for the possible financial effect of the legislative restrictions, between $415 million and $486 million of the 30 June 2004 investments of the Aboriginal and Torres Strait Islander Land Fund were not in authorised investments. This involved breaches of Sections 39 and 48 of the FMA Act as well as Section 83 of the Constitution.12
  • The DVA's investment of $56.6 million, as at 30 June 2004, in a managed money market trust was non-compliant in that the trust held investments that were not authorised under the FMA Act. This also reflected breaches of Sections 39 and 48 of the FMA Act and Section 83 of the Constitution.

Governance and reporting

At the time of audit, consistently sound governance and reporting processes had yet to be developed and implemented by all audited entities for their investment of public funds, as follows:

  • Two of the six audited entities had yet to document an investment strategy. In addition, one of the entities with an investment strategy has not reviewed or updated its strategy in the last nine years, although funds being invested had more than doubled over this period.
  • Two of the FMA Act agencies employ an investment adviser or fund manager. Substantial fees have been, and continue to be, paid to each of the firms involved. However, the contracting approaches taken have not provided open and effective competition for these roles.
  • The Commonwealth is exposed to credit risk when entities invest public funds. However, in four of the audited entities, there was an absence of defined policies and management procedures for counterparty credit risk.
  • Three of the five audited entities that purchase their investments directly had not adopted procedures to maximise the returns on individual investments, for a given level of risk. The sixth audited entity invests through a fund manager. ANAO found little evidence of this agency assessing the ongoing performance of its investment in order to inform the decision to continue this approach, which has been in place for nine years.

Audit conclusion

Overall, ANAO found that, for a number of entities, there had been shortcomings in the management of the investment of public funds. Entities require strategies and procedures that both comply with the investment parameters provided by the Parliament and optimise risk-adjusted returns. In this context, the report makes seven recommendations addressing compliance, value for money in investment strategies and financial reporting of the investment of public funds. Implementation of the recommendations should collectively lead to a level of management and focus commensurate with the quantum of public funds under investment.

Agency response

Agencies that responded to the draft report agreed, or agreed in principle, to all recommendations. In addition, a number of agencies provided summary comments on the report, as follows:


Finance notes that investment of entities covered by the audit have occurred under either the CAC Act or the FMA Act. In the case of the FMA Act, the allowable investment choices are low risk in nature and are either set out in the Act itself or the FMA Regulations. In the case of the CAC Act, Commonwealth authorities are limited to specific and conservative classes of investments listed in the Act, with provision for further investment choice to be approved following consideration by the Treasurer.

Only 13 FMA Act agencies have investment powers and these investment powers are generally limited to the balances of particular Special Accounts. Finance notes that for entities referred to in the report, the value of investments in some instances is quite significant while in other instances the amounts are much smaller, and can be as low as $1 000. In relation to both FMA Act agencies and CAC Act Commonwealth authorities the report does not identify any entity that has made investments that have defaulted.

Finance considers that the report will serve to focus entities' attention on the management of their investment activities and compliance with their legislative parameters. Finance has, in the past, drawn agencies' attention to the requirements of the framework and will continue to do so, where appropriate, in the future.


Treasury welcomes the work undertaken by the ANAO to identify and improve compliance with the legal framework for investment activities by relevant Commonwealth entities. Treasury notes that the responsibility to ensure compliance with the legal framework lies with the Board of each agency subject to Section 18(3) of the CAC Act. Treasury supports the recommendations made in the report for helping to achieve this.

Treasury notes that the guidance to be issued by central agencies under Recommendation 7(c) will take a generic form, to remind agencies subject to Section 18(3) of the CAC Act of their obligations to adhere to the legislative framework for investments. Treasury also notes that, consistent with the overriding responsibility of Boards, it would not be appropriate for Treasury to undertake an audit role or to review agencies' legislative compliance or financial performance in relation to their investment activities.


DVA agrees with the overall conclusions of this report. DVA acknowledges it needs to enhance its internal governance framework to ensure future legislative compliance and effective management of invested public money.

DVA in response to ANAO's findings, has undertaken steps to rectify its existing non compliance and is in the process of improving its investment management strategies.


ITSA agrees with those recommendations relevant to its investment responsibilities pursuant to the Bankruptcy Act 1966. ITSA notes that it is not a commercially oriented agency and therefore has invested ‘surplus public money' conservatively and in accordance with the Bankruptcy Act. ITSA has commenced adoption of appropriate strategies to implement an investment strategy, application of credit risk management policies and, wherever possible, maximisation of investment returns.


ANSTO has always endeavoured to maximise the return on investments. The actions taken to increase competitiveness and to update policies and their implementation, will improve those returns and reduce risks.


SBS agrees with the ANAO's overall conclusions that all public entities require strategies and procedures that balance compliance with the investment parameters provided by Parliament and optimises returns for given levels of risks.

SBS has always strived in its investments to ensure that legislation requirements are met and the returns are optimised within an appropriate level of risk. It was pleasing to be rated better practice in regards to maximising investment returns.


1 Figures reported as market value of investments.

2 Department of the Treasury (Treasury), Review of the Commonwealth Government Securities Market: Discussion Paper, October 2002, p. 89.

3 ibid, p. 90.

4 Namely: the Aboriginal and Torres Strait Islander Commission (ATSIC) (in respect to the Land Fund Special Account); the Department of Veterans' Affairs (DVA) (in respect to the Defence Service Homes Insurance Scheme Special Account); and the Insolvency and Trustee Service Australia (ITSA) (in relation to the Common Investment Fund).

5 Namely: the Special Broadcasting Service Corporation (SBS); the Australian Nuclear Science and Technology Organisation (ANSTO); and the National Museum of Australia (NMA).

6 Namely: the Indigenous Land Corporation (ILC); the Australian National University; and the Coal Mining Industry (Long Service Leave Funding) Corporation.

7 The FMA Regulations are disallowable instruments and, as such, are open to the scrutiny of Parliament.

8 The Financial Framework Legislation Amendment Bill, represented to the Parliament in December 2004, proposes to amend a number of Acts, including the CAC Act, to transfer from the Treasurer to the Finance Minister the power to approve investments not otherwise permitted by legislation.

9 The non-compliant entities were identified from ANAO's detailed audit of six entities and a desk audit of all Commonwealth authorities. However, it needs to be recognised that the full extent of non compliance cannot be identified from a desk audit process because of the limitations in relying on reporting by entities of their investment holdings to identify non-compliance.

10 There are two entities where, due to differing interpretations of the relevant CAC Act provisions, there is uncertainty about whether some investments were compliant or not. Finance is in discussion with both entities regarding this issue.

11 For example, Treasury noted that Section 39 of the FMA Act authorises certain entities to invest public money in bank bills of exchange and bank issued negotiable certificates of deposit, indicating that those are regarded by Parliament as an acceptable risk for public money.

12 Spending money contrary to the purpose of an appropriation, or in excess of the amount appropriated, contravenes Section 83 of the Constitution. In this respect, the Special Appropriations for FMA Act agencies to invest money standing to the credit of a Special Account require that the investments be in authorised investments.