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                                                                                                                                                           SUMMER 2005

       Remembering 2005 …
      looking forward to 2006
As 2005 draws to a close, it’s useful to look back on the         standards are audited now rather than at year-end. There have
key experiences and events of the year, and anticipate            been some instances where those balances have been audited by
what 2006 will bring.                                             external audit, but on a number of occasions agencies have
                                                                  obtained early assurance from their internal auditors, so as to
From my perspective, 2005 will be remembered as a year
                                                                  minimise the risk of problems arising at year-end. I encourage
which saw Victoria’s finances in a relatively healthy state;      agencies to seriously consider the importance of taking such a
of steadily improving financial management in the public          step if they haven’t already done so.
sector; of a relatively pain-free transition to the new
Australian equivalents to International Financial Reporting
Standards; and enough live examples of immature                   – continued on page 2
governance processes to remind us to guard diligently
against taking good responsible practice for granted.
As this newsletter goes to print, I am about to table my
                                                                     PURPOSE OF OUR NEWSLETTER
report on the results of 30 June 2005 financial statement            Auditing in the Public Interest is published to provide information
and other audits. This report will largely reinforce the             to public sector agencies on recent activities of the Victorian
comments made above. Financial reports continue to be                Auditor-General’s Office, and current developments in financial
completed reasonably promptly in the public sector,                  disclosure and reporting. Information on recently tabled and
although some slippage on the government’s earlier                   upcoming reports is also provided.
announced timelines this year meant that some of those
timelines were not met.
The financial health of some segments of the public                  Contents
sector, while improved on past years, still requires
something more than simply close monitoring to provide               Remembering 2005 … looking forward to 2006 ................................. 1
the necessary assurance that the price and estimated                 Recent reports tabled in parliament................................................................. 2
volumes of activities are appropriately balanced, and that
                                                                     • Follow-up of selected performance audits
we continue to reinforce the long-term perspective in
                                                                       tabled in 2002 and 2003 ................................................................................................. 2
planning so as to provide certainty to present
management practices. This is particularly true around               • Auditor-General’s Report on the Finances of
                                                                       the State of Victoria, 2004-05 .................................................................................... 3
capital development work, but could equally be applied
to assessing resource requirements associated with                   • Results of 30 June 2005 financial statement
long-term service demand.                                              and other audits ....................................................................................................................... 4
                                                                     Upcoming reports.................................................................................................................... 5
From the auditor’s point of view, 2006 will see the public
sector face the full implementation of the new accounting            2004-05 annual report......................................................................................................... 5
standards, likely tight reporting deadlines (particularly for        A-IFRS reporting challenge for universities
30 June 2006) and possibly increased demands on my                   and TAFE institutions ......................................................................................................... 6
Office to respond to ad hoc inquiries. All of these forces           Our new financial audit toolset launched .................................................. 7
require careful management. It is critical in these
                                                                     Senior staff news...................................................................................................................... 7
circumstances that issues are addressed early, for instance,
ensuring that the opening balances on the new accounting             Office exhibit at the 2005 Royal Melbourne Show .......................... 8

                                              Victorian Auditor-General’s Office
    – continued from page 1
    Likewise, I would also encourage all audit committees             committees, for their consideration. These reviews are
    to arrange a meeting with their external auditor in               noted in these newsletters. Earlier ones are available on our
    March or April 2006 to agree on the timelines, broad              website.
    parameters of the audit (including assessments around
    risk) and accounting treatments so as once again to               In closing, may I express my appreciation to all those
    ensure that influences on an audit that can be anticipated        involved in the audit process - both as preparers or as
    are resolved well before balance date.                            auditors. I wish you all a happy and safe festive season,
                                                                      and look forward to catching up again in the new year.
    On the broader mandate front, we have completed a
    number of major inquiries and performance audits during
    the year. While some have application to particular sectors,
    a large number of these reports have more universal
    application. I would commend these to agencies, and               Wayne Cameron
    particularly their chief executive officers and their audit       Auditor-General

                                                                       action by the Department of Human Services (DHS) to
    RECENT REPORTS TABLED                                              address outstanding recommendations arising from our
                                                                       original report. Issues around performance measurement
        IN PARLIAMENT                                                  and reporting, improving how DHS and councils work
                                                                       together, and addressing the risk to the effectiveness of
                                                                       the regulatory system arising from the difficulty in
      Follow-up of selected performance audits                         finding staff to undertake council food safety activities
           tabled in 2002 and 2003 (2005:15)                           need to be resolved. We concluded that there continue to
                                                                       be inadequacies in the administration of the regulatory
                                                                       framework and that it is unlikely that this will change to
                                                                       the better while the Food Act 1984 does not require the
                                                                       key agencies to better account for their performance.
                                                                      • The Fire prevention and preparedness follow-up found
                                                                        that considerable progress had been made by the Country
                                                                        Fire Authority, the Department of Sustainability and
                                                                        Environment (DSE) and the Office of the Emergency
                                                                        Services Commissioner in implementing the
                                                                        recommendations of our report May 2003. This includes
                                                                        improved arrangements for coordination of fire
                                                                        management across the state, changes at DSE to
                                                                        implement a “365-day” model of fire management which
                                                                        better balances resources and activities around the year,
                                                                        increases in the fire management work force, and better
                                                                        asset and equipment management. However, long-term
                                                                        challenges remain, and agencies must retain their
                                                                        commitment and sense of urgency. Key issues include the
                                                                        completion of the wildfire component of the Fire Safety
                                                                        Victoria Strategy and long-term work force planning
                                                                        in DSE.
    On 27 October 2005, our report following-up 4 performance
                                                                      • Our follow-up on the March 2003 Drug education in
    audits completed in 2002 and 2003, was tabled in parliament.
                                                                        government schools report found that the Department of
    The 4 performance audits were:
                                                                        Education and Training had implemented a number of
    • The Management of food safety in Victoria follow-up               recommendations to address our earlier recommendations.
      found that there had been some improvement in the                 This includes improving accountability in schools for the
      regulation of food safety in Victoria since our October           delivery of drug education, developing a strategic plan for
      2002 audit. However, there is a need for improvement in           parent engagement and the implementation of the Drug
      compliance with the requirement to undertake annual               Education Evaluation and Monitoring Project to measure
      inspections in around half of the councils visited, and for       the success of drug education initiatives.

2                                                 Victorian Auditor-General’s Office
• The follow-up on our October 2002 report Mental health        References to “A-IFRS net result from transactions”, “net
  services for people in crisis found that while the            result from other economic flows” and the associated
  Department of Human Services and the Mental Health            tables on financial performance, though prepared from
  Review Board had implemented many of our                      data compiled from existing accounting standards, were
  recommendations, it was too early to tell if these steps      presented in a format that the government has signalled it
  were sufficient to address the growing demand for mental      intends to adopt in the future. These results were not
  health crisis services.                                       reflected in the audited financial report and, accordingly,
                                                                have not been subject to audit.
                                                                The state’s significant operating surplus has benefited
                                                                from the continued strong performance of the economy
 Auditor-General’s Report on the Finances of                    and domestic equity markets. These factors have resulted
   the State of Victoria, 2004-05 (2005:16)                     in increased revenues from Commonwealth grants and
                                                                investment returns. In addition, superannuation costs
                                                                have remained relatively low due to the impact of high
                                                                investment returns on the state’s unfunded superannuation
                                                                Our analysis of the state’s financial performance since
                                                                1999-2000 shows that while inflation has increased by
                                                                14 per cent, state revenue has grown by 34 per cent, and
                                                                state spending by 25 per cent.
                                                                While the government needs to continue to monitor
                                                                factors impacting on its revenue base and rate of
                                                                expenditure growth, the financial position of the state
                                                                remains strong.
                                                                The report also identified opportunities to enhance the
                                                                disclosures in the Annual Financial Report. We will
                                                                continue to work closely with the Department of Treasury
                                                                and Finance on these issues.

The Auditor-General’s Report on the Finances of the
State of Victoria, 2004-05 was tabled in parliament on
16 November 2005. It analyses the state’s financial
performance and position for the 2004-05 financial year.
A substantial operating surplus was generated for the
year: $3 962 million for the State of Victoria, of which
$2 144 million was for the general government sector
(budget sector).
While we issued a clear audit opinion on the government’s
2004-05 Annual Financial Report, we included an                       Artist’s impression of a section of the new showgrounds site,
“emphasis of matter” paragraph in the audit report                    the redevelopment of which was commented on in the report.
because, in our view, there is a material inconsistency                     (Photo courtesy of the Department of Infrastructure.)

between the commentaries and explanations contained
within the Annual Financial Report (highlights section
and chapters 1 to 3) and the audited financial statements.
The commentaries and explanations contained within the
2004-05 Annual Financial Report in relation to the net
result were not presented in a manner that is consistent
with the reporting framework adopted in the audited
financial report.

                                            Victorian Auditor-General’s Office                                                        3
     Results of 30 June 2005 financial statement                     There was some improvement in the time taken by agencies
              and other audits (2005:17)                             to complete their audited financial and other accountability
                                                                     • 79 per cent of state agencies met the 12-week
                                                                       statutory reporting target (71 per cent in 2004),
                                                                       with improvement evident across most sectors of
                                                                       government and the state’s major agencies
                                                                     • 95 per cent of local government agencies met the
                                                                       3-month statutory reporting target for that sector
                                                                       (95 per cent in 2004), consolidating the significant
                                                                       improvement made in previous years.
                                                                     This outcome was particularly pleasing, given the
                                                                     additional disclosures required for 2004-05 financial
                                                                     reports associated with the transition to Australian
                                                                     equivalents to International Financial Reporting Standards
                                                                     from 2005-06.
                                                                     Notwithstanding the improved timeliness of financial
                                                                     reporting by agencies, the annual reports of most
                                                                     government agencies were not tabled until the latest
                                                                     possible date allowed by legislation. This needs to improve
                                                                     in future years so that the accountability benefits of
    Our Results of 30 June 2005 financial statement and other        completing audited financial statements in much shorter
    audits was tabled in parliament on 15 December 2005.             time frames are not compromised.
    The report sets out:
                                                                     While public sector agencies had generally established
    • the results of financial statement audits for 476 state        effective systems of internal control, our audits found
      and local government agencies with a 30 June 2005              scope for improvement by some agencies - particularly in
      balance date                                                   relation to the implementation of effective risk management
    • the outcomes of 3 special audits, examining progress of        (including fraud prevention) frameworks and information
      the EastLink project; management of the Commonwealth           technology (IT) controls.
      Games Athletes’ Village project; and harness racing            The report highlighted the continuing financial difficulties
      industry reforms – adequacy of consultation                    faced by a number of the state’s public hospitals and
    • an update on the status of an audit of the Regional Fast       municipal councils, and the need to strengthen the
      Rail project.                                                  accountability arrangements for the state’s 1 617
                                                                     government schools. It also highlighted the increasing
    The 30 June 2005 audit round resulted in the issue of 456
                                                                     incidence of reported fraud across the public sector,
    clear audit opinions and 11 qualified audit opinions on the
                                                                     requiring ongoing agency attention to ensure that effective
    financial statements of public sector agencies. The audit
                                                                     prevention strategies are in place.
    opinions on the financial statements of local governments
    and regional library corporations also referred to               For each of the previously-mentioned special audits,
    “standard” statements prepared by these entities, with           the report identified a need for the relevant audited
    3 audit opinions on “standard” statements subject to             agencies to strengthen their practices and made several
    qualification. We also issued 92 clear audit opinions and        recommendations to assist them.
    2 qualified audit opinions on performance statements of
    municipal councils and regional water authorities.
    The number of qualified audit opinions slightly increased
    in 2004-05. This was mainly due to difficulties experienced
    by some local government entities in complying with the
    legislative requirements associated with the introduction
    of more comprehensive “standard” statement reporting in
    the year.

4                                                Victorian Auditor-General’s Office
       UPCOMING REPORTS                                            We also provided an up-to-date statement on our responses
                                                                   to the December 2004 independent performance audit of
                                                                   our Office.
                                                                   Some of the highlights contained in the annual report
                                                                   • the independent performance audit confirmed that the
                                                                     Auditor-General and the Office are complying with the
                                                                     requirements of the Audit Act: achieving our objectives,
                                                                     and largely operating effectively, economically and
                                                                   • we met or exceeded our performance targets for the
                                                                     quantity, quality and timeliness of our major audit reports
                                                                   • we achieved an 82 per cent client satisfaction rating
Over the coming months, we intend to present the                     (target 80 per cent) from stakeholders on our surveyed
following reports for tabling in parliament:                         parliamentary reports

• Strategic work force management in Victoria Police               • we issued 99 per cent of our audit opinions (98 per cent
                                                                     in 2003-04) within statutory deadlines
• Managing backlog sewerage connections
                                                                   • 77 per cent of our audit clients (74 per cent in 2003-04)
• Condition of state-owned residential aged care facilities
                                                                     expressed their satisfaction with the way we conducted
• Access to specialist medical outpatient care in Victoria’s         our financial statement audits
  major health services
                                                                   • we commenced a major redevelopment of our financial
• Meeting the skill requirements of the manufacturing                statement and performance audit methodologies
                                                                   • a Special Investigations Unit was established to conduct
• Maintaining Victoria’s rail infrastructure assets                  special audit reviews and investigations
• Results of special reviews and other investigations              • we launched a new 2004-05 to 2006-07 Corporate Plan.
• Results of financial statement audits for agencies with          The annual report is available on our website at <http://
  other than 30 June 2005 balance dates, and other audits.>.
Information on these reports can be found on our website
at < >, then search under <audits in

Our annual report for 2004-05 was tabled in parliament on
25 October 2005.
The theme of the annual report was Sustainable performance
and accountability, and the contents of the report supported
our prime purpose of improving performance and
accountability in the Victorian public sector.
We reported on our activities aimed at:
• adding value through our parliamentary reports and
• issuing prompt, high standard audit reports on financial
• managing our Office through effective and innovative
  audit operational and financial management strategies.

                                               Victorian Auditor-General’s Office                                                  5
        A-IFRS REPORTING                                             view that material subsidiary companies would need to
                                                                     prepare 2 sets of financial statements if the accounting
         CHALLENGE FOR                                               policies used in preparing their separate financial
                                                                     statements differ from those of the parent.
           INSTITUTIONS                                                                  Superannuation

    All universities and TAFE institutions are among the first       There have been claims by some university superannuation
    Australian reporting entities to prepare financial statements    funds that they are unable to provide individual universities
    using Australian equivalents to International Financial          with data to satisfy their accounting and disclosure
    Reporting Standards (A-IFRS) at 31 December 2005.                requirements associated with defined benefit plans on the
    Hence, they find themselves in the front line of addressing      basis that the funds cannot reliably allocate the fund assets
    the emerging challenges associated with the new                  and defined benefit obligations to the participants of the
    accounting framework. Following the commitment by the            funds. While expressing disappointment to these claims,
    Commonwealth Government in June 2002 to implement                our Office notes that AASB 119 Employee Benefits
    sector neutral accounting standards across both the private      provides relief to participants to a multi-employer defined
    and public sectors, the Victorian Auditor-General’s Office       benefit plan to account for the plan as if it were a defined
    has endeavoured to assist its many client agencies in the        contribution plan where sufficient information is not
    transition to A-IFRS. While many issues have been                available to use defined benefit accounting. Accordingly,
    addressed, a number of accounting and reporting matters          our Office will accept entities accounting for such multi-
    still require clarification and resolution.                      employer defined benefit plans in accordance with the less
                                                                     demanding requirements of a defined contribution plan if
    This article outlines the most contemporary concerns of          there is a statement in writing from the fund and/or actuary
    preparers and auditors for universities and TAFE                 to support the unavailability of data.
    institutions reporting at 31 December 2005.
                                                                     Another related issue for the education sector is the ability
                                                                     for universities to recognise the reimbursement from the
               Consolidation of subsidiaries                         government associated with settling their defined benefit
                                                                     obligations. Under the previous Australian Generally
                                                                     Accepted Accounting Principles and the current A-IFRS
    For the purpose of accounting under A-IFRS, most                 framework, the concept of probability is used in the
    universities and TAFE institutions will no doubt satisfy the     recognition of an asset. However, AASB 137 Provisions,
    definition of a not-for-profit entity, but what about their      Contingent Liabilities and Contingent Assets and AASB
    subsidiary companies? Are they for-profit or not-for-profit      119 Employee Benefits states that a right to reimbursement
    entities? It is important to ensure that the appropriate         from another party for the settling of an obligation can only
    classification is applied as there are differing accounting      be recognised when it is virtually certain that the
    requirements between for-profit and not-for-profit entities      reimbursement will be received.
    which would directly impact on an entity’s financial
    position and performance.                                        In UIG Action Alert 04-8, the UIG members concluded
                                                                     that UIG Abstract 51 Recovery of Unfunded
    In the absence of any authoritative guidance from the            Superannuation of Universities should be superseded by
    Australian Accounting Standards Board (AASB) to assist           the A-IFRS. UIG members agreed that the assessment of
    in distinguishing a for-profit entity from a not-for-profit      virtual certainty should be made by universities rather than
    entity, the Australasian Council of Auditors-General has         the UIG. In light of this stance, our Office is of the view
    prepared a guidance paper which sets out a number of             that universities will be able to continue the recognition of
    criteria to be considered in distinguishing between a for-       a receivable from the government as a separate asset under
    profit and a not-for-profit entity. A copy of this guidance      A-IFRS.
    paper is available on our website at <
    au>, <reports and publications>, <good practice guides and                        Revenue recognition
    other guidance>.
    Once the classification of an entity has been determined,        The AASB is proposing to issue a guidance to reflect a
    consideration will need to be given to where consolidation       “re-interpretation” of the requirements of the contributions
    is required of a for-profit and not-for-profit entity as AASB    standard. Under ED 144 Proposed Australian Guidance to
    127 Consolidated and Separate Financial Statements               accompany AASB 1004 Contributions, the recognition of
    requires consolidated financial statements to be prepared        income will depend on whether there are conditions
    using uniform accounting policies. Our Office is of the          attached to the contribution. For the purpose

6                                                Victorian Auditor-General’s Office
of the guidance, a condition is a stipulation where the
contribution will have to be returned if the assets are not
used as specified.
Consistent with existing requirements, a recipient will
continue to recognise income once they have control of
the contribution if there is no condition attached to the
contribution. What is different now is that if there are
conditions attached to a contribution, the recipient will
recognise an asset and a corresponding liability on the
initial recognition of the contribution. Income will
subsequently be recognised with a corresponding reduction
in the liability as the obligations attached to the
contributions are fulfilled.                                             (From left) David O’Neill and Shaun Mayfield (both from
                                                                               the Queensland Audit Office), and Earnest Kim
It is the AASB’s intention to have the proposed guidance to                  (Victorian Auditor-General’s Office), members of a
                                                                            joint financial audit methodology development team.
AASB 1004 for application for reporting periods beginning
on or after 1 January 2005. In other words, the proposed
re-interpretation may impact on the way that contributions        From our Office’s perspective, a collaborative approach to
are recognised by entities with reporting periods ending on       the development was appealing on 3 counts:
31 December 2005.                                                 • Knowledge. Access to the significant intellectual capital
                                                                    of the 2 audit offices.
                                                                  • Rigour. The collaborative approach, with a focus on
                                                                    ensuring all policies, guidance and as far as practical,
OUR NEW FINANCIAL AUDIT                                             procedures were consistent, would ensure that the
                                                                    development of these items would be subject to rigorous
  TOOLSET LAUNCHED                                                  questioning and debate. This level of rigour would go
                                                                    a long way to ensuring that the final product would be
                                                                    of a high standard.
It’s not often that we in the auditing business have something    • Costs. The additional governance costs would be
to shout about – such occasions are few and far between.            substantially offset by substantial cost sharing between
When they do arise, the opportunity is too good to miss,            our 2 offices.
and such is the case with the launch of our new financial
                                                                  To date, it seems that the benefits anticipated in the joint
audit toolset, “ipsam”, which stands for integrated public
                                                                  business case have been largely achieved, although the true
sector audit methodology. The new methodology was
                                                                  test of this may be some time down the track. Having
officially launched in early November 2005 and represents
                                                                  established a common financial audit platform, other
another step in the continual progression of our Office.
                                                                  opportunities offer themselves for exploration – such as
The new methodology consolidates on earlier audit                 through the development of common training modules
methodology developments of our Office, which included            supporting the new toolset. These experiences reinforce the
moving to automated working papers in the early 1990s,            benefits of joint collaboration indicated earlier. Other audit
and the internal development of our own electronic                offices have already expressed their interest in this product.
financial audit methodology (EFINA) in 1998.
Developed in collaboration with the Queensland Audit
Office, “ipsam” is a Lotus Notes-based product. It
combines electronic audit files and policy and guidance
                                                                         SENIOR STAFF NEWS
material, as well as a range of other help and guidance
databases. It caters for the changes in the auditing              • Dr David Gowland, Director, Financial Audit, has
profession and the benefits from the substantial technical          completed his secondment with the Office and has
developments that have occurred since the development of            returned to RMIT University.
EFINA.                                                            • Ray Winn has taken up the position of acting Director,
The development of “ipsam” marks the first occasion that            Performance Audit.
2 audit offices have collaborated in a joint venture to           • Kim Lazenby, formerly acting Director, Performance
develop public sector audit software. The fact that the             Audit, has commenced a 12-month secondment with the
project has come in on time and on budget was especially            Western Australian Audit Office.
pleasing. Such an outcome was only achievable through the         • Peter Vetsicas has taken up the position of acting
focused endeavours of all those involved in the project.            Director, Computer Audit Group.

                                               Victorian Auditor-General’s Office                                                  7
    OFFICE EXHIBIT AT THE 2005                                               the community. Our participation is aimed at broadening
                                                                             the community’s understanding of our important financial
    ROYAL MELBOURNE SHOW                                                     management and accountability role.
                                                                             The Office realises that the venue is primarily one for families
                                                                             and, as such, our exhibit was focused on providing a fun
                                                                             and educational experience for visitors of all ages. Our
                                                                             exhibit featured a corporate information area, as well as a
                                                                             “Wizard with Numbers” audit game and hooky game activity.
                                                                             The quality of our exhibit was acknowledged this year by
                                                                             being awarded second place in the “Best display by a
                                                                             government or semi-government authority”. First place was
                                                                             awarded to the Department of Sustainability and
                                                                             Environment, and Koorie Heritage Trust/Community
                                                                             History Awards came in third.

           Our Office exhibit at the Royal Melbourne Show attracted
                               visitors of all ages.

    Each September, the Office stages an exhibit at the Royal
    Melbourne Show. The Government Pavilion at the
    showgrounds has been the traditional venue for the exhibit.
    However, with major redevelopment works currently
    underway at the showgrounds, and the unavailability of the
    pavilion, a new site enabled government and semi-
    government organisations to continue to showcase their
    initiatives, products, services and achievements to the
    community. Around 350 000 people visit the Government
    Expo over the 11 days of the show.
    The exhibit is a key component of our Office’s
    communications strategy – particularly our interaction with

                                                  FURTHER INFORMATION

        Office directors and audit managers are usually your first           Further information about any of the issues contained in this
        point of contact for technical matters. The Strategic Audit          newsletter, or about the Victorian Auditor-General’s Office,
        Planning, Polices and Standards Group also provides technical        may be obtained from:
        and policy advice to financial and performance auditors.

        This newsletter is prepared by the Victorian Auditor-General’s
                                                                             John Olesky
        Office. Every effort is taken to ensure that the information is
                                                                             Manager, Reports and Communications
        accurate. Neither the Office, nor any of its employees, shall
                                                                             Victorian Auditor-General’s Office
        be liable on any grounds whatsoever to any party in respect of
                                                                             Level 34, 140 William St
        decisions or actions they may take as a result of using the
                                                                             Melbourne Vic. 3000
        information contained in this newsletter.

        The information in this newsletter is of a general nature only       Fax: (03) 8601 7010
        and is not intended to be relied upon as, or as a substitute for,    Email: <>
        specific professional advice.                                        Office website: <>

8                                                        Victorian Auditor-General’s Office

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