In accordance with provisions of the Companies Acts, the company auditor is formally appointed by the shareholders-that is to say the owners of the company-at the annual general meeting. He audits the company's financial statements and supporting books and records, testing for compliance with companies legislation and recognised accounting standards. His appointment thus has a statutory basis.
Almost invariably the shareholders appoint the auditor recommended by the company board and in practice, following the guidance in the Statements of Auditing Practice, the auditor deals with the board. He discusses the scope and terms of the audit with the board and, when agreement has been reached, he addresses an engagement letter to the chairman of the board or an officer such as the company secretary. That letter sets out the agreed scope of the audit and the arrangements for charging the company for the audit.
In short, the company is in a client relationship with the auditor. In form, the shareholders stand in that relationship but, for most practical purposes, the board stands for the company in its client relationship with the auditor. It is the responsibility of the company, not the auditor, to determine the company's accounting policies. The company, of course, must comply with provisions of the Companies Acts.
Nowadays, it is also required by law to comply with accounting standards set by the Accounting Standards Review Board (ASRB). It will also be expected to comply with, or disclose departures from, the Australian Accounting Standards, issued by the Institute of Chartered Accountants in Australia (ICA) and the Australian Society of Accountants (ASA), where these have not been replaced by the ASRB's standards.
As a matter of professional practice the company auditor will carry out his audit in conformity with the Statement of Auditing Standards (AUS1) and the Statements of Auditing Practice (AUP1-24) which have been issued by the ICA and ASA. These standards and practice statements (referred to in what follows as Australian audit standards) were developed by the Australian Accounting Research Foundation (AARF), a body established by the two institutes. The AARF had regard to generally accepted principles applicable to audits conducted under the Companies Acts as well as other legal and ethical responsibilities of auditors operating in the private sector.
The private sector company auditor, obviously, is accountable to the company which he audits-in principle, to the shareholders. The individual auditor is accountable also to the professional institute of which he is a member, for his adherence to audit standards. The institutes are self-regulating bodies which make observance of the standards mandatory for their members, and have established disciplinary arrangements to maintain compliance.
The auditor also is accountable, through the courts, for his compliance with relevant statutory provisions. In this context he is accountable in a wider sense to those who rely on his reports and opinions. The extent of that wider accountability is currently a contentious issue, and not something that I need to try to delineate precisely for present purposes.
What is relevant is that there is a real client relationship -between the company and the auditor, but that relationship is conditioned by statutory provisions, by the auditor's compliance with Australian audit standards, and by the auditor's accountability to others-Drawing on this analogy with the private sector auditor I may re-pnrase my question as: 'Does a client relationship exist between public sector auditees and the Auditor-General, and how is any such relationship conditioned by statutory provisions, application of auditing standards, and the Auditor's accountability to others?'
The possible contenders for a client relationship with the Auditor-General would seem to be:
Before considering those contenders for client relationships, I shall outline the nature of the statutory provisions that establish the Auditor-General's role, the relevance of auditing standards and the Auditor-General's accountability: In short, the Auditor-General's mandate, and some implications that flow from it.
The Auditor-General, pursuant to the Audit Act and provisions in Acts establishing statutory authorities, is ' the external auditor of the Commonwealth executive and Commonwealth authorities, and exercises statutory responsibilities to report to the Parliament on his audits of the executive and the other agencies.
Legislative provisions confer on the Auditor-General extensive powers of access to locations and to information, as well as the power to call people before him and examine them on oath. He is also given wide discretion as to the information he may include in reports to the Parliament and the matters he may draw to the attention of Ministers.
The audit mandate given the Auditor-General by the various Acts is a broad one, providing authority for comprehensive audit of the executive and all separately constituted agencies of the Commonwealth ranging over large-scale and diverse activities from public administration, regulatory functions and research to industrial, transport, communications and financial enterprises.
The comprehensive auditing approach signifies the planning, programming and conduct of a cycle of audits that examine and assess the legal compliance, administrative compliance and financial regularity, of auditees, and the economy, efficiency and administrative effectiveness with which they carry out their operations. Over the full cycle, covering a period of years/the range of audits conducted should in principle embrace all those aspects. The scope of any individual audit during the course of the cycle may comprise any one of these elements, a combination of some of them, or all of them.
In practice, priority has to be given to the traditional attest audits, conduct of which is required by statute. In consequence, the conduct of audits addressing economy, efficiency and administrative effectiveness is constrained by resource considerations to a limited number of high-priority audits. These are selected so as to maximise coverage of important programs and activities, and minimise risks of failing to uncover significant deficiencies in auditee's exercise of their public accountability responsibilities.
The essential role of the Auditor-General is to improve the economy, efficiency, administrative effectiveness and accountability of the Commonwealth public sector through comprehensive auditing of the executive and Commonwealth agencies, and reporting on audits.
Ministers, their departments and statutory authorities are accountable to the Parliament for their management of the resources the Parliament has provided. The Parliament in turn looks to the Auditor-General for assurance of the fulfilment of these public accountability obligations.
Given its central role in the public accountability cycle it is, in my view, incumbent on the Australian Audit Office (AAO) that it be a leader in public sector auditing standards and practice. That, I may say, is a more complex assignment than just applying the Australian' audit standards.
The structure of a department of state, both functionally and financially, is entirely different from that of any private sector entity. The structure of statutory authorities varies according to the functions which each is authorised by law to perform and to the specific powers granted by legislation. Some statutory bodies are similar in certain respects to a public company, but there are essential differences arising out of their existence as creatures of the Parliament. Not least important are the social policy objectives, and constraints on decision-making, which commonly are features of the establishing legislation and of course, there are the requirements of public accountability.
Further, the legislation that lays down the Auditor-General's responsibilities is not prescriptive in matters such as the scope of audits and the methodology, to be applied, but leaves the determination of these to the Auditor-General.
For these reasons and because of the diverse nature of public sector bodies, it is not open to the Auditor-General just to apply auditing standards determined by external bodies to which he has no responsibility. He must take responsibility for the standards that he applies in particular circumstances having regard to the legislative environment in which he operates, and to the requirements of the Parliament. One important consequence, for officers of the AAO, is that responsibility to the Auditor-General must take precedence over their responsibilities to the professional institutes.
That said, for some elements of the AAO's mandate, particularly in regard to the audit of financial statements, the AAO's audit objectives are akin to the objectives of commercial audits in the private sector. Correspondingly, Australian audit standards for auditing financial statements can be applicable to public sector audits, subject to their compatibility with and relevance to the AAO's mandate. Broadly speaking, the AAO adheres to the Australian audit standards where they are relevant to audits carried out by the Auditor-General and do not conflict with the wider responsibilities of the Auditor-General to the Parliament.
There are, in fact, several elements of the Australian audit standards which have little relevance to the Auditor-General's work. To take a simple example, AUP9, relating to audit engagement letters, has no application to the audit of departments and statutory authorities. But the more substantial distinctions between the Australian audit standards and auditing standards authorised by the Auditor-General for application in the AAO are of two kinds:
I do not propose to discuss efficiency audit standards here, but I do want to say something about differences in standards relating to independence and some aspects of quality control, which have a bearing on my theme.
A United Nations Expert Group (United Nations Expert Group Meeting on Public Accounting and Auditing, Vienna, October 1985, sponsored by the United Nations in co-operation with the International Organisation of Supreme Audit Institutions (INTOSAI)), in endorsing the need for separate audit standards for the public sector, observed recently that' ... the standards on independence...are different in government audit than those in private audit.' The Group was focusing in
particular on the independence of the audit institution from the executive government and political institutions, rather than on the independence of individual auditors from the auditees they audit. It added that 'the need for indepedence and objectivity in audit can hardly be overemphasised.'
Recognition of the independence of the Commonwealth Auditor-General is enshrined partly in legislation and partly in convention. The Auditor-General has security of tenure, except in the event of misbehaviour or incapacity, until he reaches a statutory retiring age. His statutory functions, as already noted, leave it to him alone to determine the nature and scope of audit activity appropriate to the exercise of those functions, the standards to be met and the methodology to be employed. He is not constrained by a requirement to agree with a Minister, a board of an authority or any other person regarding any aspect of his audit activity. As we shall see, the independence issue is a crucial element in the relationship between the executive and the Auditor-General.
In relation to quality control there is a further important difference betweeen private sector arrangements and the Auditor-General's mandate. That mandate imposes on the Auditor-General the duty of forming audit opinions and of reporting those opinions to a Minister of the Government or to the Parliament. He can delegate some of his functions to senior personnel of the AAO, but ultimate responsibility cannor be delegated: it has to be borne at the level at which the legislation confers it.
The AAO's arrangements for managing audit activities must embody adequate processes of co-ordination and review to satisfy the Auditor-General that he and his delegates have adequate bases for the opinions they form and the reports they sign. While individual auditors are accountable for the professional performance of their duty, the AAO's procedures must ensure that, over the full breadth of its mandate, there is consistent adherence by personnel or agents to its standards, planning procedures and methodology. A consequence is that responsibility in the AAO is exercised through a hierarchical structure, involving a substantial review process within the line management. These arrangements have an impact on relations with auditees.
They contrast with those in the private sector, where there is greater scope for a particular partner of the audit firm to carry the responsibility for audit opinions and reports, and for maintaining relationships with the client.
One of the AAO's corporate goals is that it be exemplary as regards the efficiency, economy and administrative effectiveness of its operations and in accounting for the performance of its functions. The Auditor-General is accountable to the Parliament for the exercise of his statutory responsibilities. All his reports to the Parliament on audits are in the public domain. The Parliamentary Committees hold public hearings on audit reports and the auditee has the opportunity of public reply.
The Auditor-General also is accountable for his management of the resources provided to the AAO. His annual reports to the Parliament on the operations of the Office should be fully as informative as are the annual reports required from departments and statutory authorities regarding their activities. The Auditor-General is accountable also to the Minister forFinance, under relevant provisions of the Audit Act, in relation to proper financial administration within the AAO itself. With this exception, the Auditor-General's formal accountability is to the Parliament. Of course in a practical sense he could be said to be accountable to the executive and auditee agencies for the standard of his audits. In other words, he owes it to them to conduct his audits economically and efficiently, and to be fair to them in his reported findings.
Against that background we may consider the relationship between the executive government and the Auditor-General. At first blush it may appear that the executive is, indeed, the Auditor-General's client. For one thing, the executive could be said to bear most of the cost of the operations of the AAO; and, in a practical sense, the executive determines the quantum of resources available to the AAO. True, the executive's expenditure proposals are subject to confirmation by the Parliament and they may well be queried by a Parliamentary Committee. But it would be unusual (to put it no higher) for the Parliament to reject a budget on the ground that it made inadequate provision for the Auditor-General's functions. Hence, for practical purposes, the executive's proposals are decisive.
Resources issues aside, the Auditor-General assists the executive through drawing attention to deficiencies in administration and recommending improvements. The AAO also has some common interests with the executive government, in relation to the promotion of public accountability. For instance, although standing aloof from policy formulation, the AAO may advise the executive on legislation affecting the audit mandate or the financial management of public bodies, as well as on such matters as public sector accounting standards, or the form of financial statements. And it is open to the executive to propose to the AAO that particular matters be subject to audit examination.
But this appearance of a potential client relationship fades when we consider the nature of the Auditor-General's audit of the executive. By far the largest individual audit task involves the audit of the accounts of the Minister for Finance and the accounting systems of his department and the other departments of state, leading to a separate audit report on the financial statements prepared by the Minister. This audit, covering the whole of the financial transactions of the Commonwealth executive, is a specific statutory requirement. Although there is some provision for reporting of irregularities to Ministers, the predominant statutory requirement is for reporting to the Parliament.
This audit has no parallel in the private sector, and not all that many parallels in overseas public audit institutions.lt uses a systems-based methodology developed in the AAO to provide a sound basis for the formation of the Auditor-General's opinion and it is carried out in accordance with high standards of professional performance, established by the AAO.
For my present purpose it is enough to observe that the executive has no power to influence the nature and scope of the audit, the methodology employed or the performance standards adopted. Hence I do not discern any sense in which the executive could be said to be in a formal client relationship with the Auditor-General in respect of this function. It is of course necessary, as a practical matter, that there be satisfactory working relationships between the AAO and the departments, otherwise it would be very difficult to carry out the audit effectively and the prospects for effective follow-up would be diminished. That is true of all our audit activity within departments, including that not associated with the audit of the Minister's financial statements.
The AAO may conduct audits of departments relating to any elements of the comprehensive audit mandate.
These may be conducted under the Auditor-General's general powers to report on matters relating to the public accounts, public moneys and stores or, in appropriate cases , under the efficiency audit provisions of the Audit Act. Reports of audits of departmental operations are transmitted to the Parliament at half-yearly intervals, usually in September and March. Reports on efficiency audits may be included with reports on other audits or may be transmitted separately. In any case, all these reports are made to the Parliament and, subject to the legal provisions, the audits themselves are carried out entirely at the Auditor-General's discretion. And, so, the executive and its departments are not his clients in these matters, either.
For the sake of Completeness, I mention one other area where there might be thought to be a client relationship between the executive and the Auditor-General. That is where the executive requests him to undertake some function, on its behalf, which lies outside his statutory functions. Examples are :
Briefly, I do not consider acceptance of such assignments to be consistent with the Auditor-General's independent role. Accordingly, I have made it my practice to decline such invitations with the consequence that, again, there is no cleint relationship. Indeed, even in matters that are within my principal functions, it is at my discretion to accept or decline Ministerial requests for audit examination of particular matters.
There is another area where the Auditor-General reports to Ministers. That is in relation to the audit of financial statements and accounting records of statutory authorities and it is convenient now to turn our attention to those authorities.
A wide range of governmental activity carried out by statutory authorities is subject to audit by the Auditor-General ,under the Audit Act or specific legislation or by Ministerial arrangement pursuant to legislation. Legislative provisions include express references to appointment of the Auditor-General, his powers, responsibilities, and the submission and frequency of audit reports. The extent of audit coverage is left to the discretion of the Auditor-General. The statutory authorities themselves play no part in the Auditor-General's appointment. His audit reports are not submitted to auditee management.
A discussion paper considered by the United Nations Expert Group, to which I referred earlier, had this to say:
'In the public sector, the auditee does not have a choice of an auditor and may have little say in determining the scope of enquiries to be made by the auditor...
The auditee is expected' to assist the auditor even when the auditee has no choice in determining the scope of audit'.
The Expert Group's discussion paper also remarked that in the private sector, if the auditor is not assisted in his inquiries by the auditee, the auditor can withdraw from the audit. That is not an option available to the Auditor-General, in audits of statutory authorities. The auditor and the auditee are, as it were, stuck with each other.
The Expert Group referred to a further key feature of public sector auditing, namely the comprehensive scope of the audit mandate. This comprehensive mandate applies to Australian Statutory authorities as well as to the executive. Consistent with the Expert Group's discussion, access to information is not a matter of agreement between the Australian Auditor-General and the statutory authorities he audits. There is specific legislative provision for access to accounts and records supplemented by a catch-all provision requiring supply of all information the Auditor-General or his delegate considers necessary to the exercise of his statutory functions.
Information obtained under these provisions is protected: not only does the exercise of due professional care preclude the use for outside purposes of information acquired by the AAO in the course of its work, but there are also legislative provisions prohibiting communication of that information to another person except in the course of duty.
In general, the legislative provisions give the AAO complete independence from the auditee, although as a matter of practice the AAO takes management views into consideration in forming audit opinions and co-operates with auditee managements in such matters as timing of reports.
As in the private sector, the setting of accounting policies and application of accounting standards are responsibilities of auditee management, not the Auditor-General. Auditees are, of course, subject to the requirements of the Audit Act, the Finance Regulations and their enabling legislation. Statutory authorities generally have to apply the Guidelines for the Form and Standard of Financial Statements of Commonwealth Undertakings, issued by the Department of Finance and have the form of their financial statements approved by the Minister for Finance. The application of the Australian Accounting Standards by statutory authorities is subject to requirements of the Guidelines and the approved form of statements. The AAO audits financial statements against the Guidelines where these are applicable. The AAO, naturally, had a considerable hand in advising the Department of Finance regarding the formulation of the Guidelines.
A further difference between the AAO's position and that of the private sector auditor relates to audit fees. Audit fees are charged by the AAO to auditees nominated by the Minister for Finance in accordance with a formula determined by that Minister, using rates determined by the Auditor-General. Generally, such auditees are engaged in activities of a commercial nature. Some auditees object to having to pay for the wider audit required for purposes of Parliamentary accountability. The contrary view is that, since accountability to Parliament is inherent in the institution of the statutory authority, the auditee should foot the bill. This is an issue of government policy, not of audit policy.
There are also other institutional differences affecting relationships with auditees, such as the quality control arrangements referred to earlier. Statutory authorities and Ministers with related portfolio responsibilities are accountable to the Parliament. The Auditor-General's reports on financial statements are required to be incorporated in the authorities' annual reports which are tabled in the Parliament. Separate audit reports on examination of accounting and other records are made to the appropriate Minister who is not required to table them and who has discretion as to whether or not he discloses such reports to the authorities.
There is here an apparent element of client relationship between the executive, i.e. through the responsible Minister, and the Auditor-General. But again, the minister has no role in determining the nature or scope of the audit and even though the Minister does not table "the reports, the Auditor-General summarises them in his half-yearly reports to the Parliament.
Nevertheless there are elements in the AAO's relationships with auditees which resemble those in the private sector. For instance, we provide the normal audit services to authorities empowered to make public borrowings and the AAO seeks to create among auditees an understanding of its role and functions, with a view to. maintaining amicable relationships with them. Good relationships can help the Office to obtain information freely and frankly and to conduct discussions in an atmosphere of mutual respect and understanding. At the same time, relationships with auditees are not permitted to be so close as to inhibit effective and impartial planning, conduct and reporting of audits.
There are some respects in which the AAO's standards for independence from the auditee resemble those applying to the private company auditor, for instance:
As in the private sector, the auditee management is responsible for internal audit arrangements and internal control systems. As an element in the comprehensive cycle, the AAO examines and reports on such arrangements and systems, and takes them into account in its programming.
What, after all that, can be said about the scope for a client relationship between the authorities and the Auditor-General? The relationship between an authority and the AAQ exhibits quite a few similarities to the client relationship between a company and private sector auditors. This is so particularly in relation to continuing working relationships and in this less formal sense we may well think of authorities as our 'clients'.
But, as we have seen, in a formal sense the position is different. The Auditor-General's appointment, mandate and reporting arrangements are set by statute. The scope and methodology of audits is at the Auditor-General's discretion. Audit fees, where applicable, are a charge determined under statutory provisions and the auditee cannot determine, modify or even negotiate, any of these things. In short, in a formal sense there is no .client relationship.
I seem to be fast running out of clients. Perhaps it is time to look at the relationship between the Parliament and the Auditor-General. Before doing so, I mention briefly that the Auditor-General audits some 50 companies owned or controlled, directly or indirectly, by the Commonwealth, usually by way of dual appointment under the Companies Acts and the Audit Act. Generally here there is something more of a client element than in the case of statutory authorities.
There are those who would say, unequivocally, that the Parliament is the Auditor-General's client. Correspondingly, the Auditor-General may at times be referred to as an officer of the Parliament, or as the Parliament's agent. In an everyday, practical, sense there is some substance in this thinking. It is from the Parliament that the Auditor-General derives his mandate. He reports to the Parliament on the executive's management of the resources Parliament has provided and he is accountable to the Parliament for his own management of resources and the effective exercise of his mandate.
The Auditor-General also assists the Parliamentary Committees which consider his reports. The Joint Committee of Public Accounts (JCPA) reviews reports he makes to the Parliament under the Audit Act and other Acts. That Committee and the House of Representatives Standing Committee on Expenditure share responsibility for review of reports of efficiency audits. The Senate Standing Committee on Finance and Government Operations may review audit reports relating to particular statutory authorities.
The working arrangements established by the JCPA provide for an Audit Observer to be present at all inquiries to assist the Committee by providing information or comment when a question is directed to him or her by a member of the Committee. The Auditor-General and his senior staff also meet the JCPA to discuss matters included in his reports to the parliament, and assist the Committee in its understanding of the implications of audit findings. At inquiries relating to audit reports which are conducted by the other two Committees, the Auditor-General may be requested to make a formal submission, attend as a witness or be represented, and give evidence in response to questions put by Committee members.
From this discussion it may appear that, if the Auditor-General is to have any client at all, the Parliament must be it. And, of course, it is, in the sense that its enactments provide the Auditor-General's charter.
But stay a moment.
The Auditor-General must, of course, observe the legislative provisions that govern his audit functions, but he is not otherwise subject to direction by the Parliament in the programming, planning and execution of audits. On the contrary, he is free to set priorities and program his work in accordance with his statutory mandate and to adopt methodologies appropriate to the audits to be undertaken. And although the Auditor-General gives members of the Parliament and its Committees factual information and advice regarding audit reports, he must maintain his independence from political influence, in order to preserve an impartial approach to his audit responsibilities. He cannot be responsive, nor give the appearance of being responsive, to the wishes of particular political interests. Certainly, the Auditor-General will give serious and sympathetic consideration to any proposal a Parliamentary Committee might put to him for audit examination of a particular matter but that is quite a different thing from a client's right to commission audits.
It is perhaps a truism that the Parliament, in a sense, is the Auditor-General's client, because its enactments prescribe his audit mandate. And we have seen, from this survey, that as a practical matter the Parliament does have something closely akin to a client relationship with him. But the relationship is not really comparable with client relationships in the private sector because of the breadth of the Auditor-General's mandate and the absence of constraints on the manner in which he interprets and executes it.
We have, it is true, discerned elements of a client role in the relationship between the statutory authorities and the Auditor-General but these are subordinate to the legislative provisions, which convey no hint of a client relationship; while the elements of a client relationship are even more diffuse in the case of the executive government end its departments.
Does it all mean, then, that the Auditor-General works for* no-one in particular, and can pretty much please himself what he does and how he does it? Perhaps, speaking literally, one might be tempted to say that within broad limits the answer is 'YES'. But that is not the answer I propose.
It is true that the effectiveness of the AAO stems in substantial measure from the terms of the Auditor-General's statutory charter, but it also depends crucially on the manner in which that charter is implemented including the quality of its reports to the Parliament.
If the Parliament is to find it worthwhile to follow-up the Auditor-General's reports and if the executive is to be persuaded to address the issues that he raises, the AAO's performance must be of the highest order.
It is not essential that the AAO please its auditees but it is necessary that it command their respect.
I refer again to the AAO's corporate goals. If the AAO is to be effective in improving the economy, efficiency, administrative effectiveness and accountability of the Commonwealth public sector, it must be a centre of auditing excellence, a leader in public sector standards and practice and exemplary as regards its own efficiency, economy and administrative effectiveness, and in accounting for its performance.
Those goals are ambitious and can, no doubt, be perceived as somewhat awesome; but they do set out what it is that the Auditor-General and the AAO are about and they do indeed represent something well worth working for.