1.1.1 This paper deals with Commonwealth (Federal) government revenues, accountability and auditing by the Commonwealth Auditor-General and the Australian National Audit Office (ANAO). (The Auditor-General is head of the Australian National Audit Office. The ANAO assists the Auditor-General to carry out his duties under the Audit Act to undertake performance audits and financial statement audits of Commonwealth public sector bodies.) The paper is designed to share ideas and to assist Supreme Audit Institutions (SAIs) seeking to undertake audits in the revenue area. The paper provides broad contextual information to support comments about the ANAO's practical approach to revenue auditing of the Australian Government's two main revenue collection agencies (the Australian Taxation Office (ATO) and the Australian Customs Service (ACS)). It is intended that in offering information on ANAO principles, practice and experience in auditing those agencies, the paper may be a resource and a practical guide.
'Revenue'
1.2.1 The definitions of revenue and outlays used in this paper reflect those used in the Commonwealth budget. (They accord with Australian Bureau of Statistics standards which are based on International Monetary Fund and United Nations statistical practices. The concepts of revenue and outlays provide a rough measure of the value of economic activity allocated through collective political choice via government, rather than the operation of market mechanisms. Revenue shows the net extent to which resources flow into the Budget from other sectors of the economy. Outlays show the net extent to which resources flow out from the Budget to other sectors of the economy for the purpose of purchase of goods and services or transfer of income.) Revenue consists of tax receipts (net of tax refunds) and non-tax receipts (interest, rent, dividends and royalties), but excludes receipts from user charging, sale of assets and repayments of advances (loans and equity) which are classified as offsets against relevant payments in the measurement of outlays. Revenue, therefore measures the value of the resources, other than borrowings, raised by Government to fund outlays.
'Public accountability'
1.2.2. Accountability has been defined as 'existing where there is a direct authority relationship within which one party accounts to a person or body for the performance of tasks or functions conferred, or able to be conferred, by that person or body (Management Advisory Board (MAB) and the Management Improvement Advisory Committee (MIAC) Accountability in the Commonwealth Public Sector, Report No. 11, AGPS, Canberra, 1993, p 13.). In simpler terms, accountability is the requirement to account (eg give a reckoning or explanation) for any actions, decisions and outcomes which fall within an individual's or an organisation's responsibility and authority. In the public sector, accountability is intended to ensure that those with authority over the use of public resources account for their use in terms of compliance, efficiency and effectiveness. (Parliament of the Commonwealth of Australia, Not Dollars Alone, Report of the House of Representatives Standing Committee on Finance and Public Administration, AGPS Canberra, 1990, p 89.)
1.2.3. There have been changes over time in the understanding of what constitutes public. The traditional compliance focus of accountability with an emphasis on financial accuracy and probity has been extended to accountability for performance more broadly. Accordingly there has been a change in the audit function away from the sole function of checking the annual financial statements of government entities towards the additional assessment of the overall performance of government activities. The ANAO has developed a comprehensive range of audit products to meet changing expectations and needs for public sector accountability.
1.3.1. The accountability arrangements in the public sector have many components. External scrutiny via auditing and particularly external auditing by the ANAO is only one component (though an important component) of the accountability framework. Other elements of the accountability framework include Parliament, agency annual reports, the media, public inquiries, external review processes such as the Freedom of Information processes and external review agencies such as the Ombudsman. The ANAO's audits form part of this interlocking framework. As highlighted later in this paper, audits support other elements of that framework, in particular the scrutiny by parliamentary committees.
1.4.1. The ANAO does more than 'audit' in a narrow sense. The overriding operating principle for the ANAO's activities is that they add value and be of assistance to public sector management, Government Ministers and the Parliament. The ANAO seeks to contribute to the broad reform agenda of government, by focussing on best practice models and the ways that administration can be improved, rather than merely on areas of deficiency. With its audits, its audit-related products and its method of operation, the ANAO seeks to facilitate improvement and to contribute to the development of operations and performance of the Commonwealth public sector. The ANAO contributes to the development of public administration through agreeing with agency management on ways in which improvements to the administration of programs can be effected during the audit process itself.
1.5.1. Australia's is a federal system of government with parliamentary institutions based, in part, on the Westminster model. The relationships between the Commonwealth (or Federal) level of Government and the eight State and Territory governments are established by the Australian Constitution and have been shaped over the years by a combination of constitutional amendment, judicial interpretation and political accommodation.
1.5.2. Each level of government has its own accountability regime which is independent of the others and includes an auditor-general. Thus the Auditor-General for the Federal Government has no mandate to examine the activities of state or territory entities.
1.5.3. Although some contextual information is provided on patterns of revenue raising in other levels of government in section 2 of the paper, this paper primarily focuses on the role of the Federal Auditor-General as it applies to the Federal Government's revenue raising activities.
1.5.4. The Auditor-General is not involved in revenue collection, revenue administration, or in suggesting corrections to taxation laws and any fiscal reforms. Those functions are performed by separate agencies and policy departments. The ATO and the ACS are the key revenue collection agencies, accounting for some 80% and 14% of the Commonwealth's revenue, respectively. In administering various industry assistance schemes such as concessional duty regimes and rebates, ACS also forgoes a further $6 billion in revenue. (ACS also has important non-revenue functions. These include trade and travel facilitation and compliance and coastal surveillance.) Commonwealth revenue administration and the development of fiscal policy are the responsibilities of the Departments of Finance and the Treasury.
2.1.1. Government revenues are derived from two sources: tax receipts and non-tax receipts. Taxes are compulsory levies imposed by government to raise revenue. There is usually no clear and direct link between the payment of taxes and the provision of goods and services. Tax receipts include fees and fines. Fees are levies which are related to the regulation of an activity or where payment is associated with provision of goods and services by government. Fines are civil and criminal penalties imposed on law breakers (other than penalties imposed by tax authorities which are included with taxes). Non tax receipts include dividends and interest payments.
2.1.2. For classification and analytical purposes, there is often a distinction made between direct and indirect taxes. Direct taxes are taxes which are not charged to the production account of producers. The main direct tax is income tax (on individuals and companies). Indirect taxes are taxes assessed on producers in respect of the production, sale, purchase or use of goods and services which are charged to the expense of production. Included in indirect taxes are sales taxes, customs duties, excise duties, land taxes and municipal rates.
2.2.1. In Australia there is a significant difference in the relative revenue and expenditure responsibilities of the Commonwealth and the States. (References to the 'States' include the Territories.) The amount of revenue raised by the Commonwealth from its own sources is considerably larger than its outlays for its own purposes. In contrast, the States own-purpose outlays outweigh their own-source revenue. Much of the Commonwealth's revenue is provided to the States to fund their services. Commonwealth general revenue assistance to the States in 1995-96 totaled $15,777 million. (Exchange rates for different currencies vis-a-vis the US $ as on 31st March, 1997 are indicated in Appendix 1 (Pg. 475))
2.2.2. Figure 1 shows the composition of general government own- source revenue and own-purpose outlays in Australia in 1994-95. Own- purpose outlays have been adjusted to include Commonwealth grants 'through' the States other than for local government purposes and to exclude all net advances.
Figure - 1 Composition of general purpose government own-source revenue and adjusted own-purpose outlays 1994-95 (Reproduced from Commonwealth of Australia, Budget Paper No 3 1996-97 Commonwealth Financial Relations with Other levels of Government , AGPS, Canberra, 1996, p 13.)
The adjusted measure adds back in to Commonwealth outlays SPPs 'through' the States (other than those for local government purposes). The adjusted measures for both Commonwealth and State levels of government abstract from all net advances, which is consistent with measures of the underlying deficit.
2.2.3. There is a substantial flow of funds from the Commonwealth to supplement the own-source revenues of State/local government. The significance of this flow for Commonwealth general government outlays and State/local general revenue is shown in Figure 2. Payments to other levels of government accounted for around 21 percent of the total outlays of the Commonwealth general government sector in 1994-95. These payments accounted for around 39 per cent of the total revenue of the State general government sector and for around 18 per cent of the total revenue of the local general government sector.
Figure - 2 Impact of Commonwealth general government payments to other levels of government 1994-95 (Reproduced from Commonwealth of Australia, Budget Paper No 3 1996-97 Commonwealth Financial Relations with Other levels of Government, AGPS, Canberra, 1996, p 14.) follows on the next page:
2.2.4. The broad pattern of Commonwealth and State revenue raising and expenditure responsibilities is longstanding. The most significant difference between the Commonwealth and the States is in relation to taxation and this results from the introduction of uniform Commonwealth income taxation in 1942 to maximise revenue to finance the war effort. Both the Commonwealth and the States have the legal capacity to level taxes, the only exception being customs and excises which the Australian Constitution reserved for the Commonwealth. The States derive own-source revenue from a range of sources, most of which are payroll taxes and taxes on property, including stamp duty. (The High Court decision of August 1997 held that the State and Territory business franchise fee regime on tobacco in NSW was invalid under the Constitution. The decision also cast doubt on the Constitutional validity of State and Territory franchise fees on petroleum and liquor. The practical effect of the decision is to invalidate those State and Territory business franchise fees which were clearly designed as revenue-raising inland taxes on goods. More details of the case and subsequent Commonwealth action are provided in section 11 of this paper.)
2.2.5. The broad bases on which taxes are levied in Australia are as follows:
2.2.6. The Australian tax system (embracing Commonwealth, State and local government systems) (Data on components and trends in Commonwealth, state and local government taxation can be found in Taxation Revenue Australia, ABS Cat No 5506.0 (issued annually). Budgetary developments, including, for example, recent taxation policy initiatives in the States are highlighted in Budget Paper No 3 Commonwealth financial relations with other levels of government 1996-97, pp8-12. See also Taxation Revenue Australia ABS Cat 5506.0 for taxation revenue statistics and brief explanations of trends in Commonwealth, State and local government taxes.) has the following salient features:
2.3.1. As noted earlier, the majority of government revenue is obtained by the Commonwealth Government. Table 1, showing Federal government revenue in 1995-96 by broad classification, shows that the major source of Commonwealth revenues in Australia is taxation.
Table - 1 Commonwealth revenue by broad classification (Commonwealth of Australia, Budget Statements 1996-97, AGPS, Canberra, 1996 Tables Dl pp 4-75-77 and D4 p4-82.)
| 1995-96 $ million |
% commwealth revenue |
|
| Taxation Revenue | ||
| Income Tax | ||
|
Individuals |
60414 | 49.7 |
|
Companies |
18252 | 15.0 |
|
Superannuation Funds |
1634 | 1.3 |
|
Withholding Tax |
1349 | 1.1 |
|
Petroleum Resource Rent Tax |
791 | 0.7 |
|
Fringe Benefits Tax |
3031 | 2.5 |
| Total Income Tax | 85470 | 70.2 |
| Indirect Tax | ||
|
Sales Tax |
12955 | 10.6 |
|
Excise Duty |
12850 | 10.6 |
|
Customs Duty |
3124 | 2.6 |
| Total Indirect Tax | 28928 | 23.8 |
| Other taxes, fees and fines | 1960 | 1.6 |
| Total Taxation revenue | 116358 | 95.6 |
| Share of GDP (%) | 23.9 | |
| Non tax revenue | ||
|
Interest |
1403 | 1.2 |
|
Dividends and others |
3899 | 3.2 |
| Total Non-Tax Revenue | 5302 | 4.4 |
| TOTAL REVENUE Share of GDP |
121660 25.0 |
100.0 |
2.4.1. As is shown in Table 1, Commonwealth non tax revenue (derived from interest and dividends) is small relative to its tax revenue. Nonetheless, the ANAO covers non tax revenue in its audits. Non tax revenue is covered in the financial statement and performance audits of the relevant agencies. Audits of this revenue source tend not, however, to present the same problems as tax audits because there is typically an agreement identifying the amount of interest or dividend to be paid and the revenue amounts are easy to determine and to collect.
3.1 Constitutional And Legislative Aspects Of The Taxation System In Australia the accounting and legal framework underlying Commonwealth Government financial transactions (both revenue and outlays) derives from the Australian Constitution and the Audit Act 1901. Together these describe the powers, responsibilities, constraints and the various participants required to conduct our system of financial administration. Other specific-purpose enactments, such as appropriation and revenue acts, or enabling legislation for statutory authorities, may adapt, augment or override the general powers and limitations of the Audit Act.
3.2 Key provisions of the Constitution relating to revenue matters include:
3.3. The Audit Act sets the ground rules for the conduct of the Commonwealth's financial affairs. It provides, among 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 public accounts, and the preparation of, and the reporting to Parliament by the Auditor-General on, the aggregate financial statement prepared by the Minister for Finance.
3.4. The Audit Act is supported by subordinate legislation comprising the Finance Regulations and Finance Directions. These consist of operational provisions pertaining to the accounting system which essentially elaborate on the broad requirements of the Audit Act.
3.5. Legislation to replace the Audit Act passed through Parliament on 2 October 1997. The package of new legislation is designed to provide a contemporary framework for both the audit function and public sector resource management and reporting and the legislation is designed to reflect the three separate elements of the existing Act, covering:
3.6. The tax system is necessarily influenced by many social forces. Political changes, economic conditions and social factors such as attitudes to tax and tax avoidance, for instance, affect the tax system. The tax system, in turn, can affect social behaviour. An example of the way in which the tax system is used to influence social behaviour is the 1993-94 Commonwealth budget initiative to introduce additional excise on leaded petrol. This was designed as an anti-pollution and health measure. By making the consumption of leaded petrol relatively less attractive than unleaded petrol the excise measure was designed to accelerate the conversion of the motor vehicle fleet to unleaded petrol. Alternatively a government may seek to encourage activities that it sees as desirable by offering tax incentives or benefits. In Australia at the Commonwealth level these include benefits to those engaged in petroleum exploration or primary production or undertaking research and development activities.
3.7. As explained in the following section, the ANAO does not question government policy (including tax policy, the responsibility for the formulation of which lies with the Department of the Treasury). However the ANAO does examine the administrative effectiveness of government policy to consider the extent to which the espoused policy objectives are being met, or could be met more cost effectively. (See for example, Auditor-General, Audit Report, Industry Research and Development Board and Department of Industry, Technology and Commerce: taxation concession and grants for industry research and development schemes, AGPS, Canberra, 1989 and Auditor-General, Audit Report No. 12 1993-94, Department of Industry, Technology and Regional Development, Australian Taxation Office, Administration of the 150% Taxation Incentive for Industry Research and Development, AGPS, Canberra, 1993.)
4.1.1. The fundamental role of auditors-general or their equivalents in democratic systems of government is to provide the elected representatives of the community (the parliament) with an independent, apolitical and objective assessment of the way the Government of the day is administering the mandate and resources approved by democratic processes. Parliamentary review and scrutiny are central to a democratic system of government, and for the parliament to do its job effectively, it needs to be well informed. The essence of accountability is transparency.
4.1.2. The mandate of the Auditor-General and therefore the ANAO is to undertake audits of financial statements, performance audits and financial control and administration audits of public sector agencies and programs. The ANAO's mandate does not extend to examining matters of Government policy per se: the setting of policy objectives is the prerogative of Government. The Auditor-General is empowered to examine how well programs are administered and whether they are meeting stated policy objectives.
The Auditor-General's responsibilities, and therefore those of ANAO, are outlined in the Audit Act 1901 and in a whole range of agency- specific legislation. The legislative arrangements for the appointment of the Auditor-General and the establishment of the ANAO mean that the Auditor-General is, by statute, independent of the political environment. The Auditor-General is appointed by the Governor-General on the advice of the Government and can only be dismissed by the Governor-General on the request of a joint sitting of both Houses of the Federal Parliament. The results of audits are reported to the Parliament, thus providing the Parliament and the community with an important source of information about the way public resources are being administered.
The Audit Act provides for audits of performance and audits of financial statements of Commonwealth public sector agencies. Within the audit mandate the Auditor-General has complete discretion in the selection of areas subject to performance audit and in the timing of audits. Given the size and complexity of agencies, it is normally impracticable to attempt to assess overall performance of agencies. Performance audits are normally directed towards specific functions and operations of an agency.
Under the Audit Act the Auditor-General has power to call for persons and records. His authorised officers have full and free access at all reasonable times to records of Commonwealth agencies and are authorised to make copies of them. The ANAO is not permitted to disclose confidential information obtained under access provisions except in a report to the Parliament.
The new Auditor-General Act provides for performance audits on lines similar to efficiency audits.
4.3.1. The ANAO produces four main audit products:
4.3.2. The structure of the ANAO into a Financial Audit Business Unit and a Performance Audit Business Unit reflects these audit functions. The key elements of these audits and the structure of the ANAO are outlined in Figure 3 following.
Figure - 3 : The ANAO Structure and Audit Products
5.1.1. Flowing from its corporate planning framework, (The strategic linkages between elements of ANAO's corporate planning framework are represented diagrammatically in Appendix 1.) the ANAO prepares annually a financial statement audit strategy, incorporating financial control and administration audits, and a performance audit strategy for each major Commonwealth agency to inform agencies of the scope and direction of audits expected to be undertaken in the next financial year.
5.1.2. ANAO Auditing Standards are established by the Auditor- General for observance in the conduct of audits by or on behalf of the ANAO. These standards are formulated having regard to the auditing standards issued by the accounting profession in Australia. They are set out in the publication Australian National Audit Office Auditing Standards. The standards reflect those adopted by the International Organisation of Supreme Audit Institutions (INTOSAI).
5.1.3. The Federal Parliament is the Auditor-General's primary client. The results of all audits undertaken, including those conducted at the request of Government Ministers, are tabled in Parliament before being provided to Government. In this way the outcomes of the audit work are transparent, seen to be free from political influence, and provide the Parliament and the public with information on the use of public resources.
5.1.4. Nevertheless, the Auditor-General recognises there is a responsibility to provide an auditing service to both the Executive Government and to the boards and management of public sector agencies. This is achieved through consulting with agency management during the audit process with a view to conveying the improvements to program administration which can be commenced before the audit is tabled.
5.2.1. The audit of financial statements involves the attestation of, and reporting on, the financial information contained in the body of the financial statements. The audit covers an examination of the accounting systems on which the statements are based, the validity of financial transactions entered into and the compliance with relevant disclosure requirements and guidelines.
5.2.2. Table 2 summarises the stages in a financial statement audit. Table 2 Stages of a financial statement audit
Strategy and Planning
|
Interim Audit
|
Final Audit
|
5.2.3. In approaching financial statement audits the emphasis is on gaining a thorough understanding of the agency's activities and the internal control structure so as to identify potential areas of risk. The risk assessment processes provide the basis for planning and directing audit effort towards those areas which are material in the context of the financial statement and those where the potential for material error or misstatement is greatest. In this task consideration is given to the agency's own program risk assessments. Where appropriate, reliance is placed on information systems by performing compliance testing (checking the operation of controls) to minimise the level of substantive testing (detailed checking of individual transactions and balances). In addition, notice is taken of the results of past financial statement audits and developments occurring within the agency.
5.2.4. Risk areas relating to financial statements of revenue agencies commonly include matters relating to:
5.2.5. Factors which affect the business risk of the Australian Taxation Office (ATO), for example, are:
5.2.6. In the audit of the ATO's financial statements, one of the significant items is taxation revenue. It is the most material and complex item reflected in the financial statements. It would therefore be afforded appropriate and extensive coverage during the audit. As taxation is self assessed and paid in accordance with legislative requirements, the audit would examine the processes used to carry out reviews of such payments, as well as assessing the mechanisms which ATO uses to minimise revenue leakage. Controls established within computer systems to account for receipts and to aid in ensuring collections are complete, would be assessed.
5.2.7. In the past tax avoidance and other breaches of taxation laws have sometimes led the ANAO to qualify the ATO's financial statements over the completeness of revenue collection. The ATO now uses a risk management strategy to demonstrate that its approach to revenue collection is reasonable. . This has allowed the ANAO to remove the qualification over the completeness of revenue collections. The ANAO therefore would review risk management practices of the ATO to ensure the latter is able to demonstrate the continued reasonableness of its approach.
5.2.8. Throughout the course of the audit, reports would be provided to the agency detailing the results of the audit work conducted.
5.2.9. Upon the satisfactory clearance of any significant accounting issues, an audit report would be provided to management for inclusion in the annual report with a copy forwarded to responsible Ministers if required by legislation or protocol. The agency would also be provided with the draft comments to be included in the reports on the results of the audit.
5.3.1. The ANAO annually undertakes a strategic planning exercise for performance audit to map out possible audit activity for the next two years. The ANAO endeavours to develop a program of performance audits to assist agencies in improving administration and accountability, relevant to Parliament's needs.
5.3.2. In formulating its strategic plan the ANAO considers earlier planning and audit work in the agency, and discussions with other agencies and interested parties. The ANAO also uses the agency's own internal audits and evaluations, annual reports, and any external reports such as those appearing in the press.
5.3.3. Specific programs or activities are selected which are likely to add value by improving accountability, economy, efficiency and effectiveness and which contribute to an appropriate coverage of an agency's operations within the limitations of audit resources available. Factors considered when assessing possible topics include:
5.3.4. The ANAO is focussing on the following strategic issues in the ATO and the Australian Customs Service (ACS):
5.3.5. A range of performance audits are directed to these issues in the ATO and the ACS. As at October 1997 current ATO audits include sales tax, the Chjld Support Agency and risk management in Small Business Income and the current ACS audit is risk management in commercial compliance The ANAO also recently completed several relevant performance audits in both agencies.*
*
The Auditor-General, Audit Report No. 1l 1996-97 Passenger Movement Charge
Australian Customs Service, AGPS, Canberra, 1996.
The Auditor-General, Audit Report No. 13 1996-97 Tax Debt Collection Australian
Taxation Office, AGPS, Canberra, 1996.
The Auditor-General, Audit Report No. 22 1996-97 Client Service Australian
Taxation Office, AGPS, Canberra, 1996.
The Auditor-General, Audit Report No. 3 7 1996-97 Risk Management Australian
Taxation Office, AGPS, Canberra, 1997.
5.3.6. The audit usually commences with a preliminary study to establish whether a full audit is warranted. In some cases, however, the decision to undertake an efficiency audit may occur as a result of findings arising from another audit, information obtained or a reference from the Parliament or one of its committees. Three recent revenue audits show the close connection in practice, between audits and between the ANAO and Parliament. The Diesel Fuel Rebate Scheme (DFRS) audit (The Auditor-General Audit Report No.20 1995-96 Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.) in 1996 was designed, in part, to re-examine progress on administrative reform of the scheme since the audit of the scheme in 1991. (The Auditor-General Audit Report No. 27 1990-91 Australian Customs Service -Diesel Fuel Rebate Scheme, AGPS, Canberra, 1991.) The Assessable Government Industry Assistance (AGIA) audit (The Auditor-General Audit Report No. 16 1995-96 Assessable Government Industry Assistance Australian Taxation Office, AGPS, Canberra, 1996.) grew from the audit work in ACS on the DFRS. The topic was discrete and important enough to warrant a separate audit and report. The ANAO audit on ACS' investigation function (The Auditor-General, Audit Report No. 25 1993-94 Australian Customs Service -Investigations Function - Directions of Change, AGPS, Canberra, 1994.) grew from the extensive inquiry by the Joint Parliamentary Committee on Public Accounts on the Midford Paramount importing case concerning ACS.
5.3.7. The audit's research and analytical processes are driven by audit criteria (the reasonable standards against which to assess existing conditions). Various approaches or methodologies can be used in the audit. These may include analysis of procedures; the analysis of results; and the use of case studies or surveys. Evidence collection can take place during both the preliminary study and examination phases of an audit. Evidence can be physical, oral, documentary and/or analytical and can emanate from a number of areas such as policy statements and legislation, published program performance data, interviews, file examinations, and management reports and reviews. For example the ATO Debt Management audit (The Auditor-General, Audit Report No. 13 1996-97 Tax Debt Collection Australian Taxation Office, AGPS, Canberra, 1996.) undertook considerable analytical work based on the agency's administrative data. The DFRS audit (The Auditor-General Audit Report No.20 1995-96 Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.) used Computer Assisted Audit Techniques (CAATs) analysis of agency data, extensive file examination and interviews.
5.3.8. Throughout the audit, issues papers may be provided to the agency's management to draw attention to significant preliminary audit findings and discuss major issues. Issues papers have the status of only a draft-for-comment, but form part of the formal exit interview stage of the audit process in which the comments and responses of the audited agency are actively sought.
5.3.9. Following the exit interview, agencies are provided with a copy of the proposed audit report. They are given a reasonable time in which to comment. For efficiency audits the minimum interval is prescribed in legislation. During this period, ANAO staff hold discussions with the agency to clarify issues and if necessary correct any errors of fact which might become apparent. The agency finally provides a formal response to the Auditor-General's recommendations and these, along with any other agency response, are taken into account in completing the report for tabling in Parliament.
5.4.1. The Auditor-General introduced Financial Control and Administration (FCA) audits in 1994-95. These audits are designed to improve the quality of public sector management. They are intended firstly to assist managers in the public sector to meet their responsibilities and, secondly, to inform Parliament about aspects of financial control and public administration which are not likely to be covered by the financial statement and performance audits.
5.4.2. Each FCA audit is conducted across a number of Commonwealth Government agencies with reports to Parliament, in the first instance, identifying individual departments. FCA audits deal with systems and procedures implemented to support and assist in the delivery and monitoring of products and services provided by the public sector. These audits therefore focus more on the corporate and housekeeping activities of government agencies. There are currently no FCA audits on revenue matters directly, although recent and current audits bear on the administration of revenue agencies. (See The Auditor-General, Audit Report No.27 1995-96 Asset Management, AGPS. Canberra 1996; Audit Report No. 16 1996-97, Payment of Accounts, AGPS, Canberra 1996; and Audit Report No.39 1996-97 Audit Committees, Canberra 1996. Better Practice Guides were issued on asset management and the payment of accounts. Management of accounts receivable is a current FCA topic.)
6.1. The financial statement strategy and the performance audit strategy for each agency are the bases for all work programs in the ANAO. The agency audit strategy plans are communicated to both Parliament and the agency.
6.2. Decisions about the selection of topics for performance audit are formally the responsibility of the Auditor-General, with advice from the Performance Audit Business Unit, which is responsible for overall planning of the performance audit program. The series of decisions focusing on the specific allocation of topics to specific parts of the Performance Audit Business Unit down to the particular composition of audit teams, is taken by the senior executives in consultation, at the most detailed level, with the team leaders.
6.3. Composition of audit teams reflects, in a broadly practical way, the balance of skills, development needs and availability of staff. There are clearly advantages in both financial statement and performance audit staff having some continuity of tasks, with the opportunity for appropriate variety. In the performance audit area in the last two years, for example, there has been considerable stability in the staffing for audits of ACS and ATO but there has been considerable variety of tasks and team composition between these two agencies.
6.4. Operationally, the audit process is treated like a project and project management principles are applied. Considerable attention is devoted to breaking down the audit process into stages to define tasks clearly, to facilitate monitoring of progress, identify risks and develop contingency plans. Resources and time are allocated to each sub task to facilitate planning and resource estimation. Regular management reviews provide the opportunity to adjust resources or the scope of the audit to ensure that the process fulfils the necessary time and coverage objectives. There is also considerable contact and consultation with the auditee in task planning and task monitoring. The ongoing audit planning and monitoring can be facilitated with a liaison officer from the agency. Both ATO and the ACS have assigned officers to performance audits from time to time to assist with liaison.
6.5. All work programs in the ANAO must be supported by an approved Audit Work Plan (AWP). The AWP is the key project management document. The AWP identifies:
6.6. Audit operational planning and monitoring occurs on an ongoing basis for both financial and performance audits. The plans specifically highlight the management of risks to the audit and set out the time, staff and financial resources required to undertake the audit.
6.7. Computer software is used to assist planning, check task progress against milestones and monitor resource usage.
7.1.1. Real accountability comes with openness or transparency. Transparency largely occurs through public reporting, and it is mainly through its reports that the ANAO seeks to add value to public management.
7.1.2. The audit reports are also a crucial means by which the ANAO itself is publicly accountable. Audit reports have come under increasing scrutiny by parliamentary committees, the public sector and the media. The 1996 performance audit report on the DFRS, (The Auditor-General, Audit Report No.20 1995-96 Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.) for example, attracted considerable public interest, partly because it was presented during the formulation of the Commonwealth Budget when the Government was considering its revenue and outlays options.
7.1.3. Communication is a key factor in achieving a good outcome from an audit. The ANAO has a policy of full communication with the agency at all stages of the audit process. The ANAO proposes to keep audit committees informed of proposed and current audits and to involve the committees in audit activity.
7.1.4. Progress reports to the agency assist communication and feedback between the ANAO and the agency. Such reports may clarify issues and may encourage timely action to address issues which become apparent during the course of the audit, before the formal completion and tabling of the report in Parliament. The ANAO is willing to brief senior management at any time on audit work. Every effort is made to achieve a cooperative approach, but this is not at the expense of audit independence; an audit report is an expression of the Auditor-General's independent view.
7.2.1. Throughout the course of the financial statement audit the ANAO provides reports to the agencies detailing the results of the audit work conducted. These typically include:
7.2.2. Upon the satisfactory clearance of any significant accounting issues, an audit report is provided to management for inclusion in the annual report with a copy forwarded to the agency's Minister in accordance with the Audit Act 1901. The agency is also provided with the draft comments to be included in the reports on the results of the audit to the Minister and the Parliament.
7.3.1. The reporting process receives considerable attention within the performance audit cycle. The ANAO has an ongoing and staged process of reporting and briefing to relevant senior executives in the ANAO and the agency. This is so that the agency has a clear understanding of the key issues and the ANAO's overall opinion on these and to seek the agency's responses to the information and recommendations presented.
7.3.2. The proposed report of an efficiency audit is sent under the provisions of s 48F of the Audit Act to the audited body for comment. The legislation provides that the agency has a minimum of 28 days in which to comment before the Auditor-General may proceed to table the report in Parliament. In the case of preliminary studies and project performance audits, there is no statutory requirement for formal agency comment, but the ANAO normally also refers these proposed audit reports for agency comments.
7.3.3. The final report is prepared having regard to the agency's comments on the proposed report. It includes ANAO recommendations and a summary of the agency's response to each recommendation. The report is tabled in Parliament with a brochure summarising key aspects of the report. Senior agency management may be offered a briefing on audit reports that are ready for tabling in Parliament.
7.3.4. Following the tabling of an audit report several other accountability measures are set in train. Some are directly related to Parliament, others relate to agencies, more directly.
7.3.5. Often parliamentary committees with a particular interest in the subject of an audit report will review in detail the Auditor-General's findings, seeking submissions, holding public hearings, and reporting to Parliament. As well, the Joint Committee of Public Accounts (JCPA) has a legislated obligation to review all reports of the Auditor-General. The JCPA has recently adopted the practice of holding public hearings at which the results of selected major audits are reviewed, in a manner similar to the reviews conducted by the Public Accounts Committee of the UK Parliament. JCPA hearings aim to raise the profile of audit reports and to canvass publicly, with the heads of audited agencies, their responses to the matters raised in the audit report.
7.3.6. The JCPA and other committees can only make recommendations to Government; they do not have the power to implement their findings. Public accountability is sustained, though, with the Government undertaking to respond to all parliamentary committee reports, including those of the JCPA.
7.3.7. A second avenue of post-audit report accountability is the provision by Ministers of periodic reports to the Minister for Finance detailing the actions of their portfolio agencies against the recommendations in relevant audit reports. The Minister for Finance forwards copies of these reports to the JCP A and the Auditor-General and they can become important documents in the JCPA's review and follow-up activity conducted by the ANAO.
7.3.8. Follow-up activities by the ANAO are designed to add to the impact of audit reports by encouraging the implementation of recommendations, to assist Parliamentarians by informing members of government departments' activities and to evaluate ANAO performance, including for example, the validity of the benefits projected at the time the audit report was tabled. Depending on significance, routine monitoring may be supplemented by a more detailed 'desk review' or a follow-up audit. Deficiencies and improvements identified in the follow-up of audits are reported to Parliament.
8.1. As outlined earlier, the ANAO's audit approach integrates the impact of information systems and the associated internal control structure and recognises that they are vital to the operations of agencies and to the development of their financial statements. ACS, for instance, as a user of advanced information technology (IT) systems, relies significantly on IT controls for ensuring the validity, completeness and accuracy of accounting transactions. ACS operates mainframe, mid range and PC systems across a number of computing environments and across differing technical platforms.
8.2. During the financial statement audit, IT auditors review computer processing environments and systems:
8.3. In the ATO these reviews focus on the major computing environment in Canberra which supports the ATO accounting systems. Selected Branch Office computing sites are also visited.
8.4. In performance audit, where a revenue agency's relevant activities or programs are closely involved with IT, these IT systems may become an integrated element of the performance audit.
8.5. Both financial statement and performance audits use CAATs to analyse agency transactions. For example the DFRS performance audit (The Auditor-General, Audit Report No.20 1995-96, Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.) employed Computer Assisted Audit Techniques (CAATs) to examine trends in rebate claims and their processing by ACS.
8.6. The Financial Audit Business Unit is testing an extensive suite of IT products to assist with their audit planning and the generation of electronic working papers.
9.1. The ANAO aims to ensure that every staff member has access to the development opportunities he or she requires to meet priority learning and development needs identified in the ANAO's corporate planning documents (See Appendix 1 for an outline of the ANAO's corporate planning framework.) and as recorded on the officer's Individual Development Plan (IDP). IDPs are prepared by the individual in consultation with his or her supervisor. IDPs assist in identifying training needs and thereby assist staff and supervisors select the most appropriate development courses from the range of in-house and external training opportunities available.
9.2. The ANAO offers standardised core internal training events and as much flexibility as possible in order to cater for staff development needs. Although there is a common training framework and core training offered to financial and performance audit staff directed to the development of generic and general skills, much of the professional development curriculum is specifically targeted to the particular audit stream. Access to internal training courses is complemented with access to external courses and job placements in government and the private sector.
9.3. With the introduction of a more commercially-oriented public service has come the need to be able to modify the emphasis when agencies have a commercial focus. Consequently increased use has been made of expertise from the private sector to facilitate financial statement and performance audits of these agencies. In parallel has been the secondment of ANAO staff to the private sector to increase the ANAO's in-house expertise.
9.4. The allocation of staff or the decision to engage contactors flows from the strategic audit planning work done for both performance and financial statement audit work. The Auditor-General has a statutory obligation to conduct financial statement audits but has discretion in the extent to which performance audits may be done.
9.5. Staff and other resources are allocated to priority areas (including areas on the revenue side) emerging from the strategic audit planning process. The ANAO acknowledges that it needs to balance flexibility in resource allocation with a degree of staffing continuity to build up expertise. The Financial Audit Business Unit has a policy to reallocate audit staff between auditees in the Unit periodically; eg, graduates every year and managers every five years. The policy is considered to be particularly important for staff at the junior and middle levels.
10.1.1. Against the features of the tax system highlighted in section 2, this section provides information on the two key revenue administering agencies - the ATO and the ACS.
10.1.2. The ATO is the Commonwealth agency which raises the largest amount of Commonwealth revenue, having revenue responsibility for some $102 billion per year. The ATO's main revenue raising functions are to administer Commonwealth legislation imposing taxation (other than customs and excise duties). Among the important tax legislation administered are:
10.1.3. The ACS accounts for the second largest collections of revenue for the Commonwealth. It has a total revenue responsibility of approximately $24b per year, taking into account revenue collections, payments and rebates and revenue forgone under concessional regimes. The collection of customs and excise revenue is one of ACS' principal roles. Among the important tax legislation administered in ACS are:
10.1.4. As to the interpretation of taxation laws, the ANAO has tax law expertise available in-house, but also obtains legal advice from external sources as necessary. Where legal advice is required on matters relating to the Auditor-General's mandate, this advice must be provided by the Attorney-General's Department. The Auditor-General can seek legal advice on other matters from other legal advisers, including advisers in the private sector, as required.
10.1.5. Matters relating to the interpretation of the Department of Finance Guidelines on the Financial Statements of Departments issued by the Minister for Finance are discussed with officers of the Department of Finance. The Guidelines require compliance with various accounting requirements and relevant mandatory professional reporting requirements. Issues are typically resolved using those mechanisms, but these mechanisms do not inhibit the ultimate independence of the Auditor- General's opinion on the agency's financial statements.
11.1. During the audit planning phase auditors acquaint themselves with the key elements of the legislation, major legislative changes, the policy context and relevant details of the administrative framework. Auditors are assisted with on-line access to corporate databases which include up-to-date and comprehensive coverage of relevant legislation and case law, instructions and policy materials in public administration and databases covering Parliamentary proceedings.
11.2. The legislative and administrative changes following the judgement of the High Court in August 1997 which effectively invalidated the State and Territory business franchise regimes (In its decision in Ha and Lim v New South Wales and Walter Hammond & Associates Pry Ltd v New South Wales, the High Court held that business franchise fees on tobacco in NSW were invalid under the Constitution. The fees were held to be duties of excise which can only be imposed by the Commonwealth. The decision also cast doubt on the Constitutional validity of State and Territory franchise fees on petroleum and liquor. The High Court decision had major budgetary implications for the States and Territories. In 1997-98 business franchise fees were estimated to raise more than $5 billion in revenue.) are examples of the major legislative and administrative changes which auditors must appreciate in undertaking their tasks. In order to protect State and Territory revenue following the High Court decision, and at the request of the States and Territories, the Commonwealth agreed to collect equivalent additional revenue via sales tax and excise (administered by the ATO and ACS) and to return all the revenue collected under the arrangements to the States and Territories. Therefore, among other things, the arrangements increase the revenue responsibility of the ATO and ACS (and in turn the responsibility of the auditor).
11.3. Auditors are also required to be aware of major, relevant organisational changes in their auditees. For example, auditors are keenly aware that the ACS has undergone extensive organisational and program changes following the implementation of a major external review (Committee of Review into the Australian Customs Service, Review of the Australian Customs Service The Turning Point, AGPS, Canberra, 1993.) completed in 1993. That review foreshadowed significant changes in the ACS approach (a new vision, mission and strategy and new organisational structure) and significant staff reductions.
11.4. Two major administrative trends in revenue agencies are self assessment and risk management. These have become pervasive influences and operational necessities for significant revenue agencies. There has been an increased reliance on self assessment in the collection of revenue since 1987. Under self assessment, taxpayers are responsible for calculating their own tax liability and they include information relevant to their assessment with their returns to the revenue collection agencies. These agencies undertake a program of selected audits on a risk basis to ensure that revenue collection is optimised. This has allowed staffing levels within these agencies to be reduced as the emphasis of tasks has shifted from processing assessments and checking, to the provision of advice to clients and performing risk-based audits of returns. The ANAO is examining the application of the risk management framework in revenue collection in the ATO and the ACS. (Current audits focus on risk management in Small Business Income in ATO and risk management in Commercial Compliance in ACS. These audits complement Report No.37 1996-97 Risk Management Australian Taxation Office, AGPS, Canberra, 1997.)
12.1. As noted previously, audits do not comment on government policy, but they may identify areas in which .the stated policy objectives are not being met. Audits may suggest administrative changes to improve the means by which the policy or administrative objectives could be achieved. Both financial statement and performance audits have generated systemic changes. For example, financial statement audit work in the ATO concerning estimation of the completeness of tax collected has led ATO to embrace an explicit risk management process towards taxation collection. Performance audits in the revenue area in recent years have also contributed to administrative changes. Two examples are the AGIA audit in ATO (The Auditor-General Audit Report No. 16 1995-96 Assessable Government Industry Assistance Australian Taxation Office, AGPS, Canberra, 1996.) and the DFRS audit in ACS. (The Auditor-General Audit Report No.20 1995-96 Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.)
12.2. The AGIA audit recommended measures by which the ATO could improve compliance strategies (administrative arrangements, education and enforcement activities) to ensure that Assessable Government Industry Assistance is identified, disclosed and the tax revenue is collected. The ANAO considers that improved compliance for assessable Diesel Fuel Rebate payments alone (DFRS being the most significant AGIA) would yield a $12 million increase in taxation revenue in 1995-96 and potential ongoing benefits of $5 million per annum in future years.
12.3. The performance audit is producing systemic changes across the ATO and other agencies. The ATO accepted the report's recommendations and is pursuing the matter of data matching with external AGIA databases and seeking the cooperation of other government agencies for the purposes of targeting education and enforcement activities. The ATO amended the instructions accompanying the tax return forms for the 1995-96 income year and its supplementary publications to explain when DFRS rebates are assessable.
12.4. The audit of the DFRS administered by the ACS examined the efficiency and administrative effectiveness of the scheme in light of its rapidly increasing expenditure and history of administrative difficulties and deficiencies. (The scheme provides around $1.25 billion annually in rebates of excise or customs duty on diesel fuel purchased for specific off- road uses, mainly in mining, agriculture, fishing and forestry operations. The total cost of administering the scheme during 1994-95 was estimated at $12 million.)
12.5. The audit revealed that the scheme lacked clear objectives, the significant deficiencies identified in the ANAO's May 1991 audit report had not been remedied, the scheme had not been effectively managed and there was scope through the adoption of risk management techniques to reduce significantly the cost of scheme outlays and administration. The audit identified estimated savings of at least $30 million per annum, along with other areas where further savings of many millions of dollars could be achieved. Following the audit, the Government announced major changes to the administration of the scheme, including measures to rectify the administrative deficiencies identified in the audit.
13.1. Tax concessions are usually delivered by tax exemptions, deductions, rebates or reduced rates. They can either reduce or delay the collection of tax revenue. The benefits provided by the concessions could equally be delivered in the form of direct outlays. For this reason, and since they have a direct impact on the underlying budget deficit, these concessions are generally called 'tax expenditures'. (The Treasury's 1995-96 Budget Paper No 1, Statement 4 provides information about the magnitude of public assistance that is provided by concessional taxation treatment and the sectors to which it is provided. The Treasury provides detail on the cost of individual tax expenditures annually in its Tax Expenditures Statement.)
13.2. The National Commission of Audit (National Commission of Audit, Report to the Commonwealth Government, AGPS, Canberra, 1996.) identified a number of problems with the use of tax expenditures. These problems were that the tax expenditures were less visible than outlays and were therefore less likely to be critically scrutinised than outlays. Another problem was that the tax expenditures were generally uncapped, open-ended and were susceptible to cost blowouts.
13.3. The Government intends reviewing all existing tax expenditures and will consider all new tax expenditure proposals to ascertain the extent to which they are contributing or might contribute to the achievement of its policy goals and whether they should be better provided as outlays programs. Tax expenditures are particularly important in the functional spending categories of general research, social security and welfare, the mining and manufacturing sectors and labour and employment programs. A particularly important tax expenditure is the superannuation tax concession.
13.4. Estimates of the magnitude of the tax expenditure are important when deciding whether to audit the programs. The ANAO's performance audits have examined such tax expenditures from time to time. The DFRS audit (The Auditor-General Audit Report No.20 1995-96 Diesel Fuel Rebate Scheme Australian Customs Service, AGPS, Canberra, 1996.) mentioned above is a notable example. On the financial statement audit side, the audit of ACS examined duty concessions afforded to importers under the Passenger Motor Vehicle Manufacturing Plan. (See The Auditor-General, Audit Report No. 19 1996-97 Results of the 1995-96 Financial Statements Audits of Commonwealth Entities, AGPS, Canberra, 1996.)
14.1.1. The Australian Tariff Classification system is based on the International 'Harmonised Commodity Description and Coding System' This system is used by every major trading nation in the world and is based on some 5000 groups of goods identified by a six digit nomenclature. Member administrations are able to use an additional two digits to further subdivide groupings of goods. The system has six interpretative Rules which, with the nomenclature, allow classification of any one good to one heading within the nomenclature.
14.1.2. Responsibility for the uniform interpretation and application of the system rests with the Harmonised System Committee, based in Brussels and which, through its Harmonised System Review Sub committee, undertakes a systematic, four year cycle of review to ensure that the system is kept up to date.
14.2.1. Australia is a signatory to the World Trade Organisation (WTO) Valuation Agreement (the Agreement). The Agreement aims to provide a fair, uniform and neutral system for the valuation of goods for Customs purposes. It is based on uniformity and certainty in its implementation and precludes the use of arbitrary or fictitious Customs values.
14.2.2. The primary basis for the valuation of imported goods is the 'transaction value', which is the price actually paid or payable for the goods with adjustments as specified in the Agreement. Alternative methods may be applied when the 'transaction value' cannot be determined. These methods of valuation are incorporated within Articles 1 to 7 of the Agreement and include methodologies such as the valuation of identical and similar goods and computed values. The basis and requirements associated with these methods as defined within the Agreement fall within sections 154 to 161L of the Australian Customs Act.
14.2.3 Responsibility for international technical uniformity and application of the Agreement rests with the World Customs Organisation Technical Committee on Valuation (Brussels), which meets bi-annually. Ultimate overall responsibility lies with the WTO Committee on Customs Valuation (Geneva). 14.2.4. For the purpose of revenue audit, the ANAO takes the tariff classification and valuation systems as given.
(a) internal control systems
15.1. The emphasis of the ANAO's approach to auditing of revenue agencies, and indeed all agencies, is to obtain a thorough understanding of agencies' business and related activities and the internal control structure so as to identify potential areas of risk.
15.2. In the audit of the ATO's financial statements, the ANAO considers ATO's own program risk assessments. The ANAO's risk-based approach meets all professional standards and provides the basis for determining the most cost-effective mixture of audit procedures to gain the necessary level of audit assurance, as well as matching audit effort and skills to the degree of audit risk by reducing time spent on low risk situations.
15.3. The financial statement audit approach for ATO is illustrated in the following figure:
Figure - 4 Financial Statement audit approach for ATO
15.4. Internal audit is important in the context of external revenue audit. Internal audit can provide agency management with the assurance that internal controls are functioning appropriately or alternatively that there is the need for early remedial action. The ANAO has long been a very strong supporter of the need for a viable and effective internal audit function in the public sector. Both performance and financial audits in the revenue areas seek to build on, or, where relevant, take account of, the work by internal audit. At the same time it is important that the Auditor-General has confidence in the rigour of internal audit and from time to time the ANAO reviews the operations of internal audit and, where appropriate, suggests improvements. (Audit committees were examined in Audit Report No.39 1996-97 Audit Committees, AGPS, Canberra, 1997.)
15.5. For example, the standard and extent of internal audit work performed in the ATO has an important bearing on the financial statement audit coverage undertaken by the ANAO. Where possible, the ANAO seeks to minimise its audit work by relying upon the work undertaken by Internal Audit. In previous years the ANAO has been able to place reliance on this work. Before a final decision is made in this respect, the ANAO reviews the current internal audit program.
(b) Legislative accountability - audit reports
15.6. Audit reports to Parliament are one of the key accountability mechanisms for the agency.
15.7. The Federal Parliament is the Auditor-General's primary client. This priority is confirmed by the legislative requirement that all audit reports are to be tabled in Parliament.
15.8. Previous sections outlined the reporting processes and gave examples of recent revenue audit reports.
16.1. The ANAO uses CAATs to analyse collection and accounting transactions.
16.2. In the ATO, for example, information to support the financial statements is derived from various ATO cash-based management systems together with manually-prepared returns capturing accrual information. This information is then input with an accounting package and spreadsheets to prepare the financial statements. The ANAO's audit of the financial statement information involves:
16.3.1. Table 1 provides data on revenue collections by the broad type of taxation, including their share of total Commonwealth revenues.
16.3.2. The ATO publishes information on the cost of collection of the taxes it administers. The net cost of collection (percentage of revenue collected including the cost of superannuation contributions by the ATO and other government agencies) for 1995-96 is 1.123%. The ATO also provides data on the cost of collection for particular taxes such as income tax and sales tax.(See Commissioner of Taxation, Annual Report 1995-96, AGPS, Canberra, 1996 pp 211-214.)
16.3.3. ACS does not regularly publish information on the cost of collection of the taxes it administers. However it is mindful of such costs. (See discussion on the costs of collection of the ACS' Passenger Movement Charge in The Auditor-General, Audit Report No. 1 1996-97, Passenger Movement Charge, AGPS, Canberra, 1996, p9.)
Strategic Linkages in the ANAO
Appendix l
