Audit of Financial Control and Administration (FCAs) - Australia

Introduction

In late 1995, the Australian National Audit Office (ANAO) introduced a programme of Financial Control and Administration (FCAs) audits, aimed at improving the quality of public sector administration by assisting and encouraging agencies to achieve better practices in areas of financial management and administration, such as asset management and accounts processing. The audits are undertaken across a selection of agencies and the result form the basis for a view of the Australian Government Public Sector as a whole, and are therefore useful to all agencies, not just those included in the audit.

This article explains the basis of the FCA audit programme, briefly summarises the better practice guides arising from the first three audits and provides the results of a benchmarking survey relating to one of the audits, namely, Audit Committees.

The FCA Audit Programme

Background

The programme of FCA audits was introduced in late 1995 following a review of the scope and targeting of the ANAO's audit activities. This review was undertaken in the context of a changing public sector environment, particularly with the increasing devolution of authority, adoption of strategies for the management of risk, changes in financial reporting and enhanced accountability.

Among other things, the review indicated there was a Parliamentary perception that devolution of management authority under Australian Government Public Sector reforms had not been matched by the commensurate evidence of accountability by public service mangers. The FCA audit programme was designed to add extra value to public sector administration through the publication of better practice guides.

Audit Topics

The selection of audit topics is based on current and emerging issues affecting the public sector; outcomes from previous audit activity; Parliamentary interest; the substantial information and knowledge gained as part of the annual financial audit program; and out ability to add value to public administration and accountability. In addition, consistent with the objective of responding to agency needs, some topics may be referred to the ANAO by agency heads. Topics selected to date include asset management, payment of accounts, audit committees, travel management, internet security, debt management and internal audit.

Most of the topics examined in the FCA programme are not likely to be covered directly by financial statement or performance audits, either because they are not likely to be significant or " material', or they have too narrow a focus, in a single entity context. On the other hand, they can have public sector ramifications which are of considerable interest, as collectively, they account for significant levels of resources and can impact markedly on programme performance.

Audit Scope and Focus

Rather than simply identifying shortcomings or minor matters dealing with administrative processes, FCA audits are concerned more with whether appropriate platforms and mechanisms for control have been properly implemented.

Essentially, the audits focus on those core, or 'housekeeping', activities that are considered vital for good management. These include guidelines, instructions, information systems, monitoring processes, systems development, integrity and ethical checklists, and audit trails.

Better practice guides are developed during audit. The content of these guides is drawn from a variety of sources, including;

a control model developed during the planning phase of each audit.
Any best practice implemented by agencies that is identified during the course of the audit; and
Research into best practice in the practice in the private sectors.

The audits are undertaken across a selection of agencies, usually between ten and fifteen. Coverage not only focuses on agencies where there are perceived problems, but also on agencies known to have good practice ( as a basis for benchmarking and the development of better practice guides).

Audit Methodology and Approach

The development of a methodology for particular audits draws on the existing methodologies for financial statement and performance audits. However, given the broad scope of potential audit topics, a methodology is chosen to suit each particular audit.

In broad terms, methodology and approach cover the following elements:

Extensive research of relevant benchmarking and other reference information, especially during the planning phase, but on an ongoing basis;
liaison with central agencies and review and analysis of relevant Australian Government Public Sector data and processes;
provision of plans and briefing sessions to field staff;
conduct of field work at a selection of agencies (of varying types) including regional offices;
information gathering at each agency on the instructions, processes, organisations, costs and technologies applying to the topic;
forming a conclusion on each agency's overall performance
issue of individual agency reports outlining the findings relating to each agency;
analysis of the information reported on each agency and obtained through other sources with a view to reporting better practice and developing relevant performance indicators;
the provision of advice on management performance in the Australian Government Public Sector in the form of reports to Ministers and the public Report to the Parliament;
the development and publication of a better practice guide; and
marketing of the outputs, namely the Report to Parliament and the better practice guide.

Like our other audits, FCA audits are undertaken in accordance with the ANAO Auditing Standards and are subject to ANAO review and quality assurance processes.

Both manual and information technology (IT) application systems are considered. Consequently, where appropriate, IT auditing is included in overall audit approaches, with the use of dedicated IT audit staff, as required. In addition, specific audits may focus on development, control and review aspects of an agency's IT activities.

Reporting

While the results of these audits are reported in the normal way to Ministers and agencies, reports to the Parliament are generic in relation to unsatisfactory findings. Reports mention by name only those organisations which have demonstrated approaches and practices that might be able to be applied elsewhere. The approach encourages entities, which might not be at the better practice end of the spectrum, to become involved in the audit. In this way, a better appreciation can be gained of what might be required in moving .to the other end of the spectrum and of the associated benefits and costs. These aspects would be examined in subsequent audits of the individual entities and reported upon as necessary.

The tangible output at the end of a FCA audit, in addition to the report to the Parliament, is a better practice guide. The practice guides provide benchmarks against which all government agencies, including those not examined in the audit, are able to compare their respective performances and to implement improvements, where considered necessary. Such indicative benchmarks are also useful in later audits to ascertain what, it any, action should have been taken in individual entities.

Each of the better practice guides is issued in the form of a cover folder and an accompanying handbook.

Promotion of the Product

To foster acceptance and support for FCA audits, a Charter was developed prior to commencing the first audit. In addition, the Auditor-General wrote to the heads of all agencies advising them of the introduction of the FCA audits, their scope and focus and report arrangements. Also at the commencement of each audit, agencies are provided with a Prospectus outlining the objective and scope of the particular audit, together with details of audit coverage and the reports to be issued.

The principal form of promotion of the product, however, has been ongoing discussion with the Parliament (Members, Committees and their Secretariats), agency management, audit committees and internal audit cells, complemented by focused seminars and workshops. The benefits of the ANAO conducting FCA audits has also been marketed to the public sector in general, through presentations by the Auditor-General and Senior Executive. This process will provide necessary feedback that will ensure the product's success.

Follow-up Reports

In keeping with the objective of providing assurance to the Parliament, audit results, the use made of the better practice guides, and the implementation of recommended improvements, will be reviewed across agencies during the course of subsequent audit activity. If insufficient progress has been made in particular agencies, there may be a need for a more focused audit of those agencies.

The results of these follow-up reviews will be reported to agencies in the normal way and are likely to be consolidated into a separate FCA report to the

Parliament. Our first follow-up audit, asset management is expected to commence in late 1997.

The First Three Audits

The first three FCA audits were completed and reported between November 1995 and June 1997. Each was accompanied by the release of a better practice guide. The audits and the companion better practice guide handbooks were:

Asset Management - Audit Report No. 27 1995-96 and the Asset Management Handbook;

Payment of Accounts - Audit Report No. 76 1996-97 and the Paying Accounts Handbook

Audit Committees - Audit Report No. 39 1996-97 and the Audit Committees Handbook

The output of the first three audits has been well received by the agencies and Parliamentarians. A short summary of the better practice guides arising from these audits is provided below.

Asset Management Principles

The Asset Management better practice guide, released in June 1996, was the first in the FCA series. The guide is based on five principles of asset management, namely:

decisions on asset acquisition or replacement, use, maintenance and disposal should be integrated with strategic planning. This is achieved by linking assets with programme delivery standards and strategies;
effective asset planning frameworks incorporate evaluation of the alternatives to the acquisition of new assets and to the replacement of existing assets. The evaluation includes a comparison of life-cycle costs;
effective accountability frameworks identify those responsible for assets. This responsibility encompasses all phases of the life-cycle. Mechanisms establish ownership, control and responsibility for use, condition and performance of assets;
effective asset disposal frameworks incorporate consideration of alternatives for the disposal of surplus, obsolete, under-performing or unserviceable assets. Alternatives should be evaluated in cost-benefit terms; and
an effective internal control structure will establish and promulgate asset policies and procedures and use an information system which provides reliable, relevant and timely data with which to make informed asset management decisions.

The better practice guide is accompanied by a comprehensive Asset Management Handbook which provides detailed guidance to help asset managers interpret and implement the five asset management principles.

Better ways to Pay Accounts

The better practice guide, Paying Accounts was issued in November 1996. The accompanying handbook provides an overview of current trends and practices for paying accounts that are being adopted by organisations around the world.

The overriding principle of the handbook is to pay the supplier' not 'process the paper'. The handbook advises that improvements and efficiencies are able to be achieved by organisations through forming alliances with strategic suppliers, establishing suitable organisational structures for paying accounts, making greater use of technological solutions, and reducing the number of steps involved in the payment process.

One of the most significant enablers to better practice outlined in the guide information technology. The principal innovations in this area relate to fully integrated financial management information systems and electronic commerce. Features of a fully integrated system might include:

electronic purchase order which extracts details from database of approved suppliers and which is authorised electronically;
electronic notification of receipt of goods/services;
automated three-way matching of invoice, purchase order and verification of receipt of goods/services; and
automatic scheduling of payments based on terms of trade recorded in the supplier database.

The Need for an Audit Committee

In 1991 the ANAO produced a better practice guide titled xAudit Committees -All Public Sector Entities should have OneV This invocation is set to be mandated by new financial management legislation which is expected to come into effect for all Australian Government Public Sector entities during 1997-98.

The June 1997 better practice guide Audit Committees was issued in the context of the impending legislation and under the concept of good governance. The guide includes a handbookdesigned to assist the governing; body of an agency establish an audit committee in accordance with currently acknowledged principles of better practice. It is based on the premise that an effective audit committee has the potential to strengthen the control environment and assist the governing body fulfil its stewardship, leadership and control responsibilities.

Whether establishing or evaluating a committee, the defining issue is the accountability framework within which the entity operates. The view taken in the handbook is that the composition of a committee should reflect the governance structures of the entity. An independent governing board is naturally complemented by an independent audit committee. For an entity governed by a chief executive officer, it is considered to be more appropriate to have a committee comprised largely (but not solely) of members taken from executive management.

Having established the committee, achieved a balanced composition and set out the powers and functions of the committee, it is equally important to address matters of process. The handbook deals with the 'workings' of audit committees. These have the potential to affect not only their efficiency but also their administrative effectiveness.

A central theme throughout the handbook is the need for a degree of formality. This applies to formal recognition of the committee, from which flows its status and authority; formal meetings and record keeping, from which flows accountability; and formal selection and rotation of members, from which flows the balance of knowledge, skill and fresh perspectives that will keep the committee relevant and credible.

Finally, the handbook contains a number of checklists and a questionnaire that are a practical means by which the central messages in the handbook can be implemented.

The Audit Committee better practice guide was developed following a benchmarking survey of all types of Australian Government Public Sector agency except Government Business Enterprises. The results of the benchmarking study are summarised in the following tabular presentation. The survey represents one methodology that will be used in the FCA audit programme; it was supported and validated by audit review at a selection of the agencies that responded to the survey.

Results of Benchmarking Survey on Audit Committees - December 1996

Subject	%	Comment
Respondents to Questionnaire	95	The survey canvassed all types of agency, except Government Business Enterprises. 137 of 146 agencies responded to the survey.
Incidence of Audit Committees
All respondents	74	Agencies without a committee were generally limited in size to those with expenditure of less than $ 10 million and staffing levels of less than 100
Those respondents with an internal audit function.	88	There was a strong correlation between existence of an internal audit function and a committee; by contrast, only 26% of agencies without internal audit had a committee.
Composition of Committees Number of members <3	7		Most committees had an appropriate membership size. A significant number of agencies included the financial controller' and the 'chief internal auditor' as full committee members; this is not desirable from an independence perspective. In addition, the majority of Committees did not have planned rotation of membership after specified periods of time.
3 to 5	62
6 to 10	28
>10	3
Qualification of members *( at least one member.)
Accounting	78		The qualifications and expertise of committee members were largely found to be adequate, particularly in relation to accounting. 23 agencies had all three types of qualifications in their membership. Some 20% of agencies, however, had members with no relevant qualifications.
Auditing	42
Information technology	36
Powers and Functions	96
Committees with a charter (or terms of reference)			A charter provides a mandate for a committee's activities.
Frequency at which Committees reviewed their charters
Within last year	50		There was a need for a majority of agencies to re-visit their charters to ensure they cover all significant aspects of the Committee's operations. Particular attention was required in regard to the relationship between the Committee and Executive Management.
1 to 5 years	36
Over 5 years or not at all	14
Committees which dealt with Internal audit	88		77% of Committees formally reviewed the effectiveness of internal audit regularly.
External audit	70		39% of Committees reviewed the effectiveness of external audit.
Accountability of Committees Committees which formally report to the governing body. Agencies that include details on Committees in their annual reports	32 40		There was a lack of accountability Reports were primarily made to the chief executive officer or the governing body. Generally only basic information is reported.

Further Information

Copies of the better practice guides, handbooks and the reports to Parliament may be obtained by writing to the Executive Director, Financial Control and Administration Branch, Australian National Audit Office, GPO Box 707, Canberra, ACT, Australia, 2601; electronic versions are also available from the ANAO's Internet homepage www.anao.gov.au.