Australia is a federation of six states and two self-governing territories. In addition, the Commonwealth Government is responsible for a number of external territories, most of which are relatively small.
Government in Australia is based on the British parliamentary system but has been heavily influenced by the constitutional principles of the United States of America. As a result, Australia has a written Constitution which:
In broad terms the Commonwealth Parliament has powers to make laws in certain areas where a common approach is deemed necessary. These areas include foreign affairs, defence, customs, immigration and quarantine. State Parliaments make laws relating to matters which more directly affect everyday life, such as police, education, water and electricity supply, and control of infectious diseases. In addition, State Parliaments control local government bodies within their respective States. Local government bodies are usually empowered to make by-laws on matters such as roads, land use and zoning, buildings, rates and garbage disposal.
Under the Constitution the States and the Commonwealth shared the power to levy income taxation. During the Second World War the Commonwealth took over the field of income tax for the duration of the war and one year thereafter as a defence measure. The States were paid reimbursement grants based on their average tax collections in the two years before the Commonwealth took over the taxation power. After this period the Commonwealth put forward a proposal to retain uniform income tax indefinitely and this was eventually accepted by the States.
1.1 FINANCIAL PROCEDURE
The Constitution is the prime source of the legislative control which is imposed on the financial and accounting arrangements of Commonwealth entities. It establishes the Consolidated Revenue Fund (CRF) into which all revenues of the Commonwealth are paid and provides that moneys cannot be paid from this fund except under appropriation made by law.
The financial management systems utilised by Commonwealth entities and the cash basis of accounting which satisfy requirements of the Constitution are established by the Audit Act 1901 as amended (the Act), and by the Finance Regulations and Finance Directions which are subordinate to the Act.
The Government generates most of its revenues from taxation, customs and excise duties. In addition to these revenues it also receives trust moneys and loan moneys. From an accounting and legal viewpoint, it is necessary to distinguish normal government revenues, trust revenues and loan receipts, and the expenditure related to each of these three types of income.
While the cash balances for these three categories are not segregated, the transactions under each are recorded separately. To effect this the Audit Act has been used to establish two other funds in addition to the Consolidated Revenue Fund.
The Loan Fund was established by section 55 of the Audit Act and requires all moneys raised by loan upon the credit of the Commonwealth Government to be placed to the credit of this fund. Loan moneys are raised under the authority of an Act and no loan moneys are expended except under the authority of Parliament in the form of a loan appropriation (Special Appropriation). There are no fixed rules as to the class of expenditure that should be met from the loan fund, this being determined by the government of the day in light of its budgetary policy. Historically, such payments have been for defence purposes, to the States for works programs, and as advances for housing.
Loans are raised in Australia and overseas. Securities issued for borrowings, in accordance with the Commonwealth Inscribed Stock Act 1911, include Treasury Bonds, Australian Savings Bonds, Inscribed Stock and Treasury Notes. Securities overseas are issued both publicly and privately in accordance with the Loans Securities Act 1919. Cash loans are offered for subscription continuously during the year, concurrently with reinvestment offers to holders of maturing securities. Savings Bonds are also on issue continuously with specified maturity dates and may be redeemed at any time subject to one month's notice. Treasury Notes are issued by periodic tenders, are transferable, and are redeemable at par on maturity at periods of either thirteen or twenty-six weeks. The proceeds of subscriptions to local loans are credited daily by the Reserve Bank to the Public Account.
Loans for temporary purposes may be raised by the issue of Treasury Bills. Treasury Bills (Public) are issued to the Reserve Bank for periods not exceeding three months to maintain cash balances in Commonwealth accounts. Treasury Bills (Internal) represent an investment of any Trust Fund cash surplus (exclusive of the National Debt Sinking Fund) for temporary borrowing to cover temporary deficits in the Consolidated Revenue Fund and to redeem Treasury Bills. It should be noted that, while these methods of funding are still available to the Commonwealth, they are no longer used.
Details of the securities mentioned above are recorded in the Australian and the overseas loans ledgers and summarised in the Public Debt Ledger maintained by the Commonwealth Department of Finance. Details of securities on issue are published in the annual budget papers.
There are four main sources of funds for repayment of the public debt:
Redemptions of maturing loans are charged to the NDSF, the Loan Fund or a combination of both. In some instances, redemptions are met from the Consolidated Revenue Fund, the main categories being aircraft and defence credits.
The National Debt Sinking Fund is financed by:
Moneys standing to the credit of the NDSF are used to repurchase securities which are still current or redeem any portion of the public debt. The accounts and records of the NDSF are kept by the Department of Finance.
The income of the LCIR is derived from appropriations of the Consolidated Revenue Fund and from interest on investments. Moneys in the Reserve Bank are applied either in repurchasing or redeeming securities forming the Commonwealth portion of the public debt, which securities are then cancelled reducing the public debt accordingly. Moneys of the Reserve Bank may also be invested. The LCI R sometimes subscribes to a special loan in which it is the sole subscriber. The uninvested balance of the LCIR is the amount standing to the credit of the LCIR Trust Account, forming part of the Trust Fund balances.
Interest payments on Commonwealth securities are met from special appropriations out of the Consolidated Revenue Fund. Reserve Bank registries in Australia pay interest to stock and bond holders. The payments are collated by the Reserve Bank and a claim lodged with the Department of Finance. The Department of Finance reimburses the Reserve Bank and subsequently claims reimbursement from the States for their share of the interest. Interest on overseas loans is paid by the overseas Regional Offices in London and Washington.
The Trust Fund was established by section 60 of the Audit Act. The Trust Fund comprises heads of the Trust Fund directed by the Minister for Finance, trust accounts established under section 62A of the Audit Act and heads of Trust Fund and trust accounts established under other Acts.
Heads of Trusts refer to accounts consisting of moneys paid to the Commonwealth for and on behalf of any person. These moneys can only be spent in accordance with the purpose of the trust whether express or implied. In this situation, the role of the Commonwealth is that of trustee. Moneys received for these trusts are wholly outside the Commonwealth Public Account.
A Trust Account is established by an Act or determination. The establishing authority defines the purposes of the trust. Section 62A(5) of the Audit Act defines the moneys which may be paid into a trust account. The predominant source of funds for such accounts is from parliamentary appropriations.
In accordance with a recommendation by the Joint Committee of Public Accounts (JCPA), the Trust Fund itself is subdivided into the following four groups:
The Constitution provides that no money may be paid from the Consolidated Revenue Fund except under appropriation made by law. An appropriation is an Act of parliament which authorises the expenditure of moneys.
2.1 The Appropriation Acts passed by Parliament may be classified as one of two types:
- departmental estimates of expenditure for the forthcoming financial year are prepared by each department, approved by the Minister and sent to the Department of Finance
- departmental estimates are discussed with the Department of Finance
- Cabinet considers all proposed expenditure
- appropriation bills and subsidiary papers are prepared by the Department of Finance
- the Budget is presented to and adopted by Parliament, usually in August, and
- appropriation bills are passed by Parliament and assented to by the Governor-General. Pending the passing of these bills, expenditure is authorised by one or more Supply Acts. These Acts provide for expenditure over the first part of the year, usually the first five months.
Parliament, when it appropriates moneys for expenditure, does so at the level at which it desires to exercise control. Appropriations for departmental administrative and salary costs are typically appropriated as one amount as running costs.
2.2 BRIDGING FINANCE
The Supply Acts provide funds for services or purposes required during the period at the start of the financial year before the Appropriation Acts are passed. This period is usually the first five months of the financial year. The amounts included in Supply are limited to five months requirements (i.e. five-twelfths of the prior year totals) except where particular programs require a higher level of expenditure or because of obligations maturing during the supply period. Supply provisions different from appropriations in the previous year, require specific authority which is provided in Supply Act (No.2).
2.3 EMERGENCY EXPENDITURE
Amounts in excess of specific appropriation may be expended by departments only with the prior approval of the Minister for Finance, who funds them from the Advance to the Minister for Finance (AMF) appropriation.
3.1 DEPARTMENT OF FINANCE
The Department of Finance, as the co-ordinating body in financial administration, is responsible for:
3.2 OTHER CENTRAL AGENCIES
The Department of the Prime Minister and Cabinet is responsible for general policy co-ordination. This role arises primarily from the Department's close involvement in supporting Cabinet meetings. The Department's areas in involvement reflect from time to time.
The Department's response to a particular problem may be to:
The Department of the Treasury advises and assists the Treasurer with economic, fiscal and monetary matters. It is specifically concerned with:
The Attorney-General's Department and the Solicitor-General share responsibility as the Commonwealth's legal advisers.
3.3 ROLE OF THE CENTRAL BANK
The Reserve Bank's "core" functions are the conduct of monetary policy and the surveillance of the financial system. As well, like many other central banks, it provides a range of banking and other services. This includes the printing and destruction of Australia's currency notes, (also, the printing of currency notes for some other countries) and banking facilities for governments and other relevant bodies.
As the central bank, the Reserve Bank provides clearing accounts for banks. It is also the principal banker for the Commonwealth Government, the governments of Queensland, Western Australia, South Australia and Tasmania, a number of statutory authorities, and authorised dealers in the short-term money market. As is international practice, it provides some banking services in Australia for other central banks and multinational agencies.
The Reserve Bank advises the Commonwealth Government on aspects of its debt management, domestic loan raising and debt servicing operations, and on behalf of the Government conducts Registries of Inscribed Stock at its Australian branches. The Registries issue securities, predominantly by tender, maintain records of ownership, pay interest to registered owners and arrange redemption of securities at maturity. There is also a facility for investors to purchase or sell parcels of Treasury Bonds at market prices up to a daily limit of $50,000 face value.
The Reserve Bank is a shareholder in the Bank for International Settlements and is represented at regular meetings of member central banks. In 1988/89, Bank staff also participated in Australian delegations to meetings of the Asian Development Bank, International Monetary Fund, International Bank for Reconstruction and Development, and Organisation for Economic Cooperation and Development. The Reserve Bank also maintains a wide range of contacts with other central banks at an operational level.
3.4 PRIVATISATION
The current Commonwealth Government has adopted a two part policy with respect to government business enterprises. One part is to privatise or partprivatise those enterprises which presently compete with private sector entities. For example, the privatisation of Australian Airlines and the partial privatisation of Qantas and the Commonwealth Bank are pending. The Government has indicated that the proceeds of those sales will be used to reduce public debt. This deduction in public debt will then release funds for future investment in public infrastructure. The other part of the policy is to restructure other enterprises to require them to operate in a commercial manner and, where appropriate, to remove the existing legislated monopolies and open up all aspects of their operations to competition from the private sector. This policy approach is being applied to telecommunications and postal services, i.e. Telecom and Australia Post.
The opposition parties have indicated that they feel that this level of privatisation is insufficient. They regularly discuss privatising all government business enterprises, contracting out the delivery of most government services and radically reducing the level of federal government activity.
Most of the Australian States are pursuing privatisation to different degrees. Policies range from the sale of (State) Government Business Enterprises through to private construction and operation of public infrastructure such as roads, water- treatment plans and electricity generation.
The primary responsibility for audit of the Australian Commonwealth public sector is vested in the statutory office of the Auditor-General, established by the Audit Act 1901. The Act sets out the terms and conditions of incumbency, tenure, powers, duties, functions and other matters governing the holdings of office and discharge of functions and duties to be performed.
The Auditor-General and staff of the Australian National Audit Office (ANAO) play a vital role in encouraging the development of sound financial and resource management of the Commonwealth public sector. This is achieved by providing Parliament and the Executive (the client) with an independent assessment of the financial and administrative operations of government organisations (the auditees), thus ensuring public accountability.
The Auditor-General's mandate specified in the Audit Act is supplemented by audit provision in other enactments relating to establishment of individual Commonwealth bodies. The Act also provides for arrangements which enable dual appointment, under the Act and the Companies Act and Codes, of the Auditor-General as external auditor of Commonwealth controlled companies.
Because of the statutory basis of the audit mandate, the Auditor-General has a paramount responsibility to fulfil the mandate, exercising his or her own judgement as to the audit approaches to be applied in the diverse situations that arise in the course of government auditing.
The Auditor-General's comprehensive audit mandate encompasses the following functions:
In general terms, the Auditor-General's mandate provides for him or her to conduct, or direct the conduct of, comprehensive auditing of departmental administration and of most Commonwealth public enterprises. The Auditor-General is responsible for the audit of the following bodies (at 31 March 1991):
Audits of accounting records of departments are conducted under the general provisions of the Audit Act (sections 41 to 41C). Audit of departments' financial statements are conducted under section 51 or, if the statement is in respect of only part of a department, section 41D. Audits of accounting records and financial statements of statutory authorities are conducted under the provisions of their enabling legislation or subject to Part XI of the Audit Act if applicable.
Statutory authority established by an Ordinance or by regulations made under an Act may be declared by the Audit Regulations to be subject to Part XI (Division 2 or 3) of the Audit Act. A statutory authority established by an Act may be declared by its constituting Act to be subject to Part XI (Division 2 or 3).
Audits of accounting records and financial statements of other bodies, such as companies in which the Commonwealth or statutory authority has a significant interest, may be conducted by arrangement with the responsible Minister under section 63P of the Audit Act. In these circumstances the audit of a company is then conducted under the Companies Code.
Performance audits carried out by the ANAO comprise efficiency audits carried out under Part VI Division 2 of the Act, project performance audits - carried out under section 54 of the Act and project audits carried out under the general provisions for audit of accounting records.
The mandate for performance auditing stops short of review of government policy decisions. It is, however, as stated in the General Statement of XII INCOSAI:
"acceptable for performance audit to incorporate the audit for information leading to policy decisions and the determination of whether policy objectives have been met".
By convention the Auditor-General provides to auditees audit services which, although not specified in the statutory mandate, are customarily provided by the external auditor. Examples are provisions of audit certificates in borrowing prospectuses and provision of letters of comfort to lending consortiums.
4.1 SAIs RELA TIONSHIP WITH THE PUBLIC ACCOUNTS COMMITTEE OF PARLIAMENT
The committees empowered by the Parliament to examine the reports of the Auditor-General play a central role in ensuring that public accountability obligations are properly exercised . It is accordingly incumbent upon the Auditor-General and the ANAO to work closely with those committees.
The committee most concerned with review of audit reports has been the Joint Committee of Public Accounts but in recent years the increasing number of Senate Estimates Committees and standing committees of the House of Representatives and the Senate have also been involved in review of audit reports. A committee may require the Auditor-General to give evidence at the committee's hearing. Normally, however, the ANAO is represented by a Group or Executive Director and the particular auditor who prepared the audit report under review.
A committee may ask an ANAO witness at a committee hearing to provide a copy of a document obtained from an auditee during an audit. Section 14C(3) of th Audit Act permits the ANAO to disclose information obtained during an audit unless the auditee's legislation (or commercial situation) makes the information secret or confidential. Accordingly the ANAO personnel may provide a committee with audit working papers or other information obtained from an audit provided that the information was not secret or confidential to the auditee. The auditee should be advised of the information so provided.
4.2 AUDITING STANDARDS
The ANAO has developed a set of Auditing Standards which are applicable to audits in the Commonwealth public sector. These auditing standards were first gazetted in August 1987 and have recently been revised. They embody where applicable, the Statement of Auditing Standards and the Statements of Auditing Practices and other guidance documents issued by The Institute of Chartered Accountants and the Australian Society of Certified Practising Accountants. The ANAO Standards also provide for the wider audit mandate of the Auditor-General.
Both Houses of Parliament have a system of committees to assist them in their work. In addition, the Houses form joint committees for various purposes. Those committees with some oversight role in financial accountability management are discussed in the following sections.
5.1 SENA TE COMMITTEES
The Senate forms (usually) six Estimates Committees which divide the departments between them and consider-
At the commencement of each Parliament, the Senate appoints a number of Legislative and General Purpose Standing Committees to inquire into, and report upon matters referred to them by the Senate. These matters may include-
Like the Estimates Committees, these committees have different departments allocated to them.
Several of the Estimates Committees have conducted inquires into efficiency audit reports.
5.2 HOUSE OF REPRESENTATIVES COMMITTEES
At the commencement of each Parliament the House of Representatives appoints a number of general purpose standing committees to inquire into and report on matters referred to them by'the House or by Ministers. These matters may include votes or expenditures, other financial matters, reports or papers. These committees cover areas of Commonwealth administration, such as
These standing committees now share the burden of inquiring into efficiency audit reports with ihe Joint Committee of Public Accounts. Individual standing committees inquire into efficiency audit reports relevant to their particular areas of concern.
5.3 JOINT COMMITTEES
The Joint Committee of Public Works reviews proposed public works to ensure that significant expenditure on capital works is both appropriate and advisable. This review may extend to the amount of revenue expected from a work of revenue-producing character.
The Senate and the House of Representatives each has a Publications Committee. The two committees, which often sit as a joint committee, may conduct inquiries into matters concerning parliamentary and government printing and publishing (such as the inquiry into the efficiency audit report on the Government Printer).
6.1 DESCRIPTION OF BUDGET SYSTEM
Throughout the 1980s Australia progressively modified its budgeting system to introduce a focus on allocative efficiency and program delivery effectiveness additional to the previous focus on distributional and stabilisation objectives. This development was driven by the need to adjust to, and desire to benefit from, the fiscal retrenchment deemed necessary in the 1980s. The budget process that evolved during this decade has the following features.
The budget system has evolved into top-down budgeting which combines aggregate Budget outlays control and incentives for program managers to be more efficient, effective and accountable. This has been achieved by Budget process while devolving responsibility for spending and program management decisions to operational departments.
Budgeting, which is now undertaken in a medium term context with economic stability as a main objective, is a continuous process. Economic forecasts, estimates and funding programs are revised on a rolling basis.
This continuous budgeting is achieved by a system of 'Forward Estimates'. These forward estimates of outlays are prepared by the Department of Finance as a base-line estimate of the level and composition of outlays expected in the absence of policy changes. These estimates are revised to allow for changing economic forecasts, other parameter changes and changes to policy.
In 1988 a system of portfolio targets was introduced. This system evolved quickly under the pressure of extensive new policy proposals in 1989. Targets are now set (called new policy caps) which involve a net growth in outlays but the cost of these new policies may be offset by savings in other areas. The responsible Minister(s) then divide the money within their portfolios or, in the care of cross-portfolio packages, between the proposals from the different portfolios. The Budget system also includes a running costs system to provide flexibility and incentives to departmental secretaries to pursue value-for-money. This running cost system contains:
6.2 BUDGET CLASSIFICATION
Since the framework of government accounting practice was formalised in the Constitution and the Audit Act there have been substantial developments both in economic theory and in the role of the Government in the economy. With these developments have come a demand for new uses for statistics on the Government's financial transactions that could not have been envisaged by those who designed a system to meet the needs of the day at the time of Federation. While the recording of government transactions between the CRF, the Loan Fund and the Trust fund is made on other than economic criteria, it is possible to reclassify the recorded figures to produce a picture of government transactions that has an economic rather than a purely accounting relevance.
The Commonwealth has adopted three alternative budget classification approaches. These are:
The functional classification brings together outlays directed towards like objectives or purposes. It thus facilitates presentation of information on the basic purposes of Government activities and on the total resources devoted by the Commonwealth to those purposes. It permits intertemporal comparisons to be made independently of local, contemporary administrative structures.
The economic type classification is designed to facilitate the study of the macro-economic effect of Commonwealth transactions and to provide the means of grouping transactions for inclusion in the Australian National Accounts. This classification scheme defines the previously mentioned concepts of outlays, revenue, financing items and the budget balance (deficit/ surplus). Outlays are further divided into current and capital classifications.
The portfolio classification refers to the aggregation of outlays according to the Ministry which has prime overall administrative responsibility. It is a valuable tool in the formulation of the budget. In addition, the approach taken to program management and budgeting in the Commonwealth emphasises a portfolio approach.
7.1 PLANNING
The budget process is now a continuous process. In effect, one year's forward estimates are progressively updated to become the next year's budget estimates as illustrated in section 7.2.2. All budget related activities are planned within this framework.
7.2 ORGANISATION AND ROLE OF THE DEPARTMENT OF FINANCE
The Department of Finance has a central role in the budget process. It assists the Government to determine its outlays, strategies and program priorities, and to allocate available resources for the efficient and effective implementation of those programs through its Budget Development and Management Program. This program of the Department of Finance consists of two sub-programs as indicated in the following diagram, which also indicates Divisions of the department responsible for delivery of the sub-programs.
7.2.1 Budget Co-ordination Sub-program
The objective of this new sub-program is to facilitate the development, implementation and public presentation of the Government's budgetary strategy through:
The General Expenditure Division is responsible for the Budget Coordination Sub-program which compasses: research into budget principles and practice; program management and budgeting; co-ordination of and policy advice on public expenditure; economic and financial conditions issues; program effectiveness and evaluation; the budgeting process; and the operations of the running costs system.
The major responsibility under the Sub-program is to co-ordinate the preparation and analysis of information on such matters as budgetary aggregates, budget and forward estimates of outlays, costs of staffing and administration, and levels of forward obligations. To meet this responsibility the Department of Finance:
Documentation published under this program includes the Budget Papers, the Monthly Statement of Commonwealth Financial Transactions (C FT) and the Australian Publishing Service Statistical Bulletin.
7.2.2 Oversight and Evaluation Sub-program
The objective of the Oversight and Evaluation Sub-program is to contribute to the achievement of overall Government objectives by analysing and advising on the scope, level and performance of Commonwealth Government programs and activities and advising on options to ensure that programs:
The Oversight and Evaluation Sub-program covers the work of all or part of five of the Six Divisions of the Department of Finance. This sub-program comprises four key elements. They are:
Also covered by this sub-program is a continuing dialogue between the Department of Finance and other departments and budget-funded authorities concerning the allocation and utilisation of resources, and program and policy reviews and evaluation.
7.3 BUDGET STEPS
The budget process and forward estimates (discussed in 6.1) are tightly linked. This process may be illustrated as below.
Source: M. Keating, "The Process of Commonwealth Budgetary Control' in Forster, J and J. Wanna: Budgetary Management and Control
In December (usually) of each year the Department of Finance consults with the other central agencies and the operating departments with a view to updating the forward estimates in January. This update reflects post-budget decisions by the Government and changes in economic and program parameters, and forms the base for the development of the next budget. The updated forward estimates are reported to the Expenditure Review Committee (ERC) and Cabinet.
The ERC is a group of very senior Ministeries chaired by the Prime Minister. The ERC is responsible-
In March/April ERC considers an economic forecast by the Treasurer and a range of proposals from Ministers, spending departments and the Department of Finance. These proposals may be-
These initial policy changes and more paremeter changes are taken up by the Department of Finance for the May update of the forward estimates. The ERC conducts another series of deliberations in May/June through to Budget date (early August). This process is illustrated below. As can be seen, these Cabinet/ ERC processes and the estimates process illustrated earlier in the section mesh together to form the budget process.
Source: M. Keating, "The Proscess of Commonwealth Budgetary Control in Forster, J and J Wanna: Budgetary Management and Control
7.4 ROLE OF CENTRAL AGENCIES
The Department of the Prime Minister and Cabinet advises the Prime Minister on matters relevant to Budget deliberations, but the main role of the department in the budgetary process is to co-ordinate the business of the Commonwealth Government. This involves ensuring that all Ministers with an interest in particular issues have had sufficient opportunity to provide input to the particular decision and to ensure that all submissions requested by the ERC are provided on time and in the agreed format, and are distributed to all ERC Ministers.
The Department of the Treasury advises its Minister, the Treasurer, in relation to the Budget. The Treasury's particular role in the budgetary process is to provide the economic, financial market and national debt assessments used to prepare the assumptions on which the Budget is based.
7.5 PUBLIC DEBT
Some aspects of public debt are discussed in section 1.1 and the position of public debt in the national accounting system is illustrated in the diagram in section 10.
The Department of the Treasury has the responsibility of raising and managing Commonwealth debt as efficiently as possible within macroeconomic policy objectives. The Treasury is also responsible for advising government on short-term debt and liquidity management and on developments in domestic financial markets.
The Australian Loan Council is a Commonwealth/State body that oversees and co-ordinates most Commonwealth, State and local government borrowing. This body was established by the Commonwealth State Financial Agreement of 1927 which was made to stop the Commonwealth and the States bidding against each other when borrowing. Today the main purpose is to keep public borrowing within macroeconomic policy objectives. The members of the Loan Council are the Prime Minister and the State Premiers or their nominees (usually Treasurers).
Under the Financial Agreement of 1927 the Commonwealth accepted responsibility for the securities of the States then on issue, by placing the State sinking funds under the control of the National Debt Commission which administered the National Debt Sinking Fund (see section 1.1). In 1975 the State's Sinking Funds were absorbed into the National Debt Sinking Fund, with separate accounts being maintained for each government. The Commonwealth and the States make prescribed payments to the National Debt Sinking Fund based on the respective amounts of debt outstanding at the end of each financial year.
8.1 ROLE OF DEPARTMENTS IN SPENDING AND CONTROL
Transactions for the receipt and payment of moneys are initiated in the departments and agencies responsible for the collection of moneys due to the Commonwealth and for expenditure of moneys for purposes appropriated by the Parliament. Records of moneys received and paid to the Commonwealth Public Account are summarised and sent daily to the regional offices of the Department of Finance. Authorisations of payments are also forwarded to Department of Finance regional offices.
Control is achieved by the appointment of officers by either the departmental secretary or the Minister for Finance to meet particular responsibilities under the Audit Act. These officers, their mode of appointment and their responsibilities are detailed below.
Certifying Officer
The Certifying Officer is responsible for certifying that payments are properly made. Certifying Officers are appointed by Departmental Secretaries and under section 34 of the Audit Act have the responsibility of ensuring that the relevant provisions of the Act, the Finance Regulations and the Finance Directions have been complied with prior to certifying that payments have been properly made.
Authorising Officer
Authorising Officers approve payments. In common with Certifying Officers, they are appointed by the Secretary. Sub-section 34(2) of the Act provides that the Authorising Officer shall not approve payment unless satisfied that:
the moneys are lawfully available for the payment of that amount
the Certifying Officer has indicated that the payment may be properly made, and
such other requirements as are prescribed, or specified in directions given by the Minister for Finance, have been complied with.
The Authorising Officer must ensure that payments are not authorised which will result in expenditure against the amount appropriated being exceeded. It is the Authorising Officer's responsibility, therefore, to keep the Appropriation Ledger, which records the amount of the appropriation available and the expenditure already authorised.
The Paymaster
The Paymaster is the officer responsible for issuing cheques from a Drawing Account, and can only pay accounts that have been certified and authorised. Paymasters are responsible for the correctness of cheques issued.
Receivers of Public Moneys
Receivers of Public Moneys are responsible for the receipt and banking of public moneys. They are appointed by the Minister for Finance or his delegate. Generally a Receiver is appointed only in capital cities and in departments which have a substantial volume of collections. Receipts, together with any moneys received from a Collector (see below), are paid daily into the Reserve Bank to the credit of the Commonwealth Public Account. The Receiver sends a Receiver's Statement, together with a stamped deposit slip, to the Department of Finance.
Collectors of Public Moneys
Collectors of Public Moneys are normally directed to pay their collections to a Receiver. A Collector either pays cash direct to a Receiver or into a Collector's Receipts Account at a bank whence it is remitted to a Receiver.
8.2 INTERNAL AUDITING
In the Commonwealth public sector there is no requirement for agencies to have internal audit. However the Australian National Audit Office (ANAO) has been recommending that departmental Secretaries introduce internal audit where it does not exist. Following a survey of internal audit in 1989 the ANAO recommended to the Department of Finance that it propose to the Government that new financial administration legislation require all Commonwealth organisations to have an internal audit function.
Of the departments and departmental outriders (i.e. associated bodies) surveyed, most had or were intending to introduce internal audit as illustrated below:
|
Departments |
Outriders |
|
| (i) With internal audit |
17 |
20 |
| (ii) Without internal audit, but planning to introduce |
4 |
4 |
| (iii) Without internal audit |
2 |
7 |
The degree to which the internal auditors of departments and departmental outriders are concerned with regularity auditing, i.e.
is a matter for their respective managements. The survey indicated that the internal auditors of departmental outriders concentrated on regularity auditing while departmental internal auditors performed both regularity and performance audits.
8.3 AUDIT COMMITTEES
The ANAO survey of internal audit mentioned in the previous section also covered the existence and operations of audit committees.
Fifty-one of the 99 organisations with internal audit had a committee of senior management and/or the boards of directors to oversight the internal audit function. All departments with internal audit had an audit committee. However, the majority of outriders and statutory authorities with internal audit did not have an audit committee.
These audit committees have been established as committees of senior management primarily to oversight and review the operations of the internal audit function. This generally involves reviewing and approving internal audit programs and plans, reviewing identified deficiencies in internal controls and the action taken to rectify them, and appraising the standard of performance of internal audit. They may also provide an avenue for high level communication with the external auditor and have responsibility for reviewing the annual financial statements. Further, assessing the performance of financial management is an additional role identified for audit committees to adopt.
9.1 ROLE OF DEPARTMENTS
Each department is required to report expenditure and revenue for which it is responsible against budget each year by way of a financial statement in the form approved by the Minister for Finance. The form of this financial statement is discussed in section 11.3. These financial statements are required to be included in the annual report of the particular department. The Guidelines for the Preparation of Departmental Annual Reports issued by the Prime Minister pursuant to section 25 of the Public Service Act also require that annual reports include details of major reviews of programs and departmental structures as well as details of reviews by the Auditor-General and Parliamentary Committees.
Each department is required to submit plans of its evaluation activities to the Department of Finance. These plans are required to specify the priorities and timing of evaluations. In some cases the Department of Finance seeks to become involved in setting the terms of reference of the evaluation or the conduct of the evaluation. All evaluations with potential budgetary implications are required to be made available to the Department of Finance. The role of these evaluations in the budgetary process (i.e. their consideration by the ERC) is discussed in section 7.3.
9.2 OTHER AGENCIES
The Department of Finance prepares a financial statement each year which is, in effect, an aggregate of the financial statements of all the departments. The two levels of financial statements are discussed in section 11.3.
The Department of Finance monitors departmental evaluations of their programs and takes part in some of those evaluations as discussed in the previous section and delivers the Oversight and Evaluation Sub-program discussed in section 7.2. These evaluations form the basis of Department of Finance advice to the ERC during the budgetary process. The ANAO recently reported on an efficiency audit of this evaluation process.
The final evaluations of whether or not the Budget was economically responsible and Government polices were appropriate and well delivered are made by the Australian electorate. The results of those evaluations are made known to the Government through political processes and, ultimately, the ballot box at regular, free elections.
The States and internal Territories of Australia are responsible for their own accounting arrangements. The "National Accounting System" as used in this context is actually the accounting system of the Commonwealth (federal) government. The framework of this accounting system (including interfaces with the State and Territory governments) is illustrated below.
10.1 DESCRIPTION OF NATIONAL ACCOUNTING SYSTEM
The Finance Ledger System (FLS) is a computerised system which is owned and operated in each State, Territory and overseas by the Department of Finance. It operates as a bureau, processing transaction data from each department, and classifying and accounting for each transaction under one or the other of the Funds.
Processing is undertaken using a batch system. Standard batch controls such as sequential batch numbers and the provision of batch and (optional) hash totals together with edit controls ensure completeness and accuracy of processing.
Departments are not obliged to operate on the ledger system but must be able to provide information in the prescribed format to the Department of Finance so that it can discharge its financial reporting obligations.
In order to meet the requirements of the Constitution and the Audit Act, the FLS must be able to record transactions by Fund. Accordingly, the FLS is sectionalised into the three Funds, with a further breakdown into transaction types within the Funds as follows:
| Fund | Section | Description |
| Consolidated | 0 | Revenue |
| Revenue Fund | 1 | Refunds of Revenue |
| 2-0 | Expenditure-Special Appropriations | |
| 2-1 | Expenditure-Special Appropriations | |
| Trust Fund | 3 | Receipts |
| 4 | Expenditure | |
| 5 | Cash Balance | |
| 6 | Investments | |
| Loan Funds | 7 | Receipts |
| 8 | Expenditure | |
| 9 | Cash Balances |
10.2 TYPE OF ACCOUNTING SYSTEM
The primary method of recording Commonwealth Government financial transactions is on a cash basis. That is, receipts are brought to account in the period received and expenditure is accounted for when the actual disbursement is made. This contrasts with the accrual basis of accounting - generally adopted in the financial statements of private sector accounting entities, Commonwealth statutory authorities, and some Australian States - whereby receipts are brought to account as they are earned or become due (even if not collected) and expenditure is recorded when a liability is incurred (whether or not payment is made in the accounting period). It is possible that the public sector will move to full accrual accounting in the 1990s.
10.3 SPECIFIC LEGISLATION
The accounting and legal framework underlying Commonwealthe Government financial transactions derives from the Australian Constitution and the Audit Act 1901 (as amended).
The Constitution establishes the Commonwealth's rights and responsibilities in financial matters, including the basic requirement for Parliament's power to legislate for the levying of taxes and for the borrowing of money on the public credit of the Commonwealth, for the exclusive right to impose duties of customs and excise, and for the power to grant financial assistance to the States. It requires that all moneys raised or received by the Executive form one Consolidated Revenue Fund to be appropriated for the purposes of the Commonwealth and that no moneys may be expended except under an appropriation made by law provided that such appropriation shall first be recommended by the Governor-General to the Parliament on the advice of the Executive.
The Audit Act sets the ground rules for the conduct of the Commonwealth's financial affairs. It provides, amongst other things, that moneys may not be disbursed unless the Minister for Finance has signed an authorisation to draw from the Commonwealth Public Account money for certain services and purposes. It also covers other matters such as the statutory rights and responsibilities of officers through whom revenues and payments are administered, the audit of the public accounts, and the preparation of, and the reporting to Parliament by the Auditor-General on the financial statement prepared by the Minister for Finance.
In November 1989 the Commonwealth Government agreed to a recommendation of the JCPA that the Audit Act 1901 be repealed and replaced with modernised legislation. Therefore it is intended to replace the Audit Act 1901 with three new Acts as below:
The Financial Management and Accountability Act
Covering "Agencies", i.e. Commonwealth departments and those statutory authorities which operate on the Commonwealth Public Account (In common with departments, these authorities deal with public moneys but do not legally own assets separately from the Commonwealth).
The Financial Provisions (Commonwealth Entities) Act
Covering "Entities", i.e. Commonwealth companies and those statutory authorities whose enabling legislation gives them ownership of their moneys and assets (regardless of whether the Entity is Budget dependent).
The Auditor-General Act
Covering matters relating to the audit mandate, powers and functions of the Auditor-General and his staff and agents.
10.4 SUPPORTING DIRECTIONS AND REGULATIONS
These Directions and Regulations require departmental Secretaries to develop and implement detailed directions for the financial management of their respective departments. These directions, which have the force of subordinate legislation, must be within the framework set by and be compatible with the Audit Act, and the Finance Directions and Regulations.
Section 9 of the Finance Ledger System previously described is accessed only by the Department of Finance. This section is used to record the contra accounts of the double entry process. Thus for example, a debit transaction in section 2 reflecting expenditure for the CRF must be matched by an offsetting credit in section 9 reflecting a reduction in cash on hand. The balance of section 9 is rolled over at the end of each year and is reconciled to the CPA.
Section 5 of the FLS represents the cash balance of trust funds, i.e. the carry forward cash balance together with the net effect of the annual section 3 trust receipts and section 4 trust payments. Any investment balances relating to trust funds are excluded from section 5.
Section 6 reflects the net impact of investment transactions during the year. No opening balances are incorporated within this item, and accordingly each department is required to maintain its own manual records for this purpose.
Accounts (Statutory Reporting Level Files)
In order to record and control expenditure by appropriation within each Fund, it is necessary to establish separate accounts for each appropriation. This also applies to the Trust Fund where it is necessary to separately identify transactions relating to each Trust Account or Head of Trust Fund.
The account number used is referred to as the Statutory Reporting Level File (SRLF). The SRLF is a four digit numeric code allocated to departments on a first come first served basis in a range between 1000 and 8999. The 9000 series is used exclusively by the Department of Finance for the section 9 cash accounts. As its name would indicate, it provides the level of summarisation required to fulfil the statutory reporting requirements of the departments and the Department of Finance.
Account Structure
The FLS serves not only an aggregation function for reporting purposes but acts as a management information system. To facilitate this, a further dissection within each account is required.
In the FLS this account dissection is achieved in two ways. Firstly, each departmental account may be allocated to a number or to all States. This is achieved by allocating access to each account to an officer in each state or to a number of officers in a particular State.
The allocation of accounts to officers is performed centrally in each department by the head Office Authorising Officer. This is the officer responsible for controlling the FLS for a particular department. The officers who are given access are referred to as Regional Office Authorising Officers.
The Regional Office Authorising Officers are identified by a four digit numeric code commonly called the AO Code. There is a relationship between the first digit of the AO Code and the first digit of the post-code for each State, except for ACT AO codes which commence with a one and overseas codes which commence with a nine.
Each Regional Office Authorising Officer records their transactions in their own part of the FLS. As a result they are able to receive monthly reports (Monthly Statement of Balances) which identify only their transactions for the accounts that they have been allocated. The Head Office Authorising Office on the other hand does not process cash transactions. The monthly report to the HOAO (Head Office Statement of Balances) therefore does not reflect transaction detail but provides balance details on each account and for each AO within the account.
A number of daily and periodic reports are produced by the FLS. Of most interest to the auditor are the Daily Batch Posting Report which indicates which batches have been processed and also checks the processing sequence by identifying missing batch numbers, and the Credit to Head of Expenditure Report which provides individual authorising officers with a list of credit transactions in respect of expenditure accounts. This latter report is produced as required.
The second method of account dissection is to divide each account into a number of lower level sub-accounts. It is against these lower level accounts that the cash transactions for each AO will be recorded, accordingly these sub-accounts are referred to as Posting Level Files (PLFs). These sub-level transactions are then accumulated to the SRLF account for reporting purposes.
Sub-accounts which exist between the reporting level (the SRLF) and the posting level (PLF) are referred to as Intermediate Accounts or INTERS. For the purpose of recording cash transactions, these accounts exist only to create a structure.
There is however a facility to designate INTERS as sub-total accounts for various branches within the SRLF. Where these INTERS are so designated they are referred to as Sub-Allocation Reporting Files (SARs).
Ledgers
The FLS contains a number of notional sub-ledgers. The most important of these are the Appropriation/Revenue ledger and the Central Ledger. The different ledgers are characterised by the different type of reports produced from them. The Appropriation/Revenue ledger provides transaction reports such as the Monthly Statement of Balances provided to individual authorising officers and the Head Office Statement of Balances. The Central Ledger does not provide transaction detail but provides expenditure totals for each Authorising Officer at the SRLF level. Balances in the Central Ledger are used by the Department of Finance to produce the aggregate financial statements for the Commonwealth.
Future Developments
In late 1990 the Department of Finance announced that it had commenced preliminary work for the redevelopment of its major accounting systems. This redevelopment is expected to take several years. The need for redevelopment has been brought about by changing user demands and the need to address the impact of changing technology.
10.5 ACCOUNTING STANDARDS
The Minister for Finance has responsibility for financial and accounting procedures, and accounting standards within the Commonwealth public sector. The Minister set accounting standards to be followed by departments in their annual financial statements in Financial Statement Guidelines for Departmental Secretaries.
These Guidelines require that departmental financial statements contain accrual accounting data on debtors, creditors and certain other assets and liabilities as a first step towards possible future full accrual accounting for departments. Both major political parties indicate that the eventual goal should be full accrual accounting. As departments become more able to produce reliable accrual accounting data, this supplemental information becomes subject to audit by the Auditor-General.
Section 50AB of the Audit Act 1901 requires the Minister for Finance to prepare a financial statement showing particulars of total receipts and expenditures, for the financial year, of the Consolidated Revenue Fund, the Loan Fund and the Trust Fund. Section 50 of the Audit Act 1901 requires the Secretary of each Department to prepare a financial statement disclosing details of receipts and expenditures of the Funds during the financial year for the Department and such other information as is required by the financial statement guidelines issued by the Minister for Finance.
11.1 STEPS IN THE ACCOUNTING PROCESS
Regional offices of the Department of Finance provide services to other departments and agencies including banking, receiving, paymaster, central payroll processing and maintenance of the Finance Ledger System (FLS). The FLS is a computerised system which maintains detailed records of the receipts and expenditures of departments and is the principal record used for the production of both the aggregate and departmental financial statements.
Transactions for the receipt and payment of moneys are initiated in the departments and agencies responsible for the collection of moneys due to the Commonwealth and for expenditure of moneys for purposes appropriated by the Parliament. Records of moneys received and paid to the Commonwealth Public Account are summarised and sent daily to the regional offices of the Department of Finance. Authorisations of payments are also forwarded to Finance regional offices where all transactions are edited and processed, and summaries are transmitted through a communications network to the Finance central computer in Canberra.
The Departments are required to develop and implement accounting systems to provide additional information for program statements and accrual data such as debtors, creditors and certain other assets and liabilities.
11.2 SCOPE OF THE PUBLIC ACCOUNTS
The Aggregate Financial Statement of the Minister or Finance presents only aggregate information on the receipts and expenditure of the Consolidated Revenue Fund, the Trust Funds and the Loan Fund. In addition it provides a reconciliation of the Funds' transactions and the Budget outcome for the year, and some further information relating to the financial affairs of the Commonwealth.
This statement reports on receipts and expenditures of the Commonwealth Public Account recorded in the Finance Leader System as at 30 June and journal entries to correct mispostings requested by Departments and approved by the Department of Finance. The statement may differ from departmental financial statements where departments have made subsequent adjustments to their accounts.
Departments prepare financial statements which disclose details of the receipts and expenditures of the Funds during the financial year and additional information such as program statements and accrual accounting data. For the purpose of departmental financial statements, 'departments' include branches of the public service in relation to which a person has the powers of a Secretary as if the branches were separate departments.
11.3 FORMAT OF THE PUBLIC ACCOUNTS
The Aggregate Financial Statement has the following format - Section I of the financial statement discloses the aggregate receipts and expenditures of the three funds and the cash and investment balances of the Funds. Where applicable, Budget estimates or appropriations are also shown.
Section II of the statement provides a reconciliation of the actual Budget outcome in terms of outlays and revenue with the transactions with the three Funds.
Section III of the statement contains particulars of directions made by the Minister for Finance pursuant to section 35A of the Audit Act to enable moneys appropriated for a particular purpose to continue to be available for that purpose where responsibility for a function has been transferred between departments. Details of determinations made by the Minister for Finance pursuant to the relevent Appropriation Act are also disclosed.
Section IV of the statement provides further information relating to the financial affairs of the Commonwealth. This information now has been expanded to disclose details of Government Securities on Issue. Amounts in the Statement have been rounded to the nearest dollar. All totals are the rounded additions of unrounded figures.
Departmental financial statements have the following format-
12.1 ROLE OF THE SAI
Section 51 of the Audit Act requires the Auditor-General to aggregate financial statement and departmental financial statements and to sign a report concerning each statement:
Section 41 of the Audit Act requires the Auditor-General to audit the accounts and records of the Department of Finance and other departments kept in accordance with section 40 of the Act.
As at 30 June 1990 there were 55 departments which were required to prepare departmental financial statements including the Australian National Audit Office (ANAO), which is subject to audit by the Independent Auditor in accordance with section 48N of the Audit Act.
12.2 PUBLIC ACCOUNTS COMMITTEE
The Joint Committee of Public Accounts (JCPA) has prime responsibility for Parliamentary oversight of the Public Accounts. The JCPA is empowered by its establishing Act to-
Examine
Report
Inquire
The structure of financial accountability and management at the Commonwealth Government level as described in this chapter is the result of a long period of evolutionary change, particularly in the 1980s, spurred on by altered economic and world circumstances. Evolutionary change continues in many of the areas discussed in this chapter.
