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QUEENSLAND

lSSJJESEAPE_R NO.9\

December 1990

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oor, Capital HillDrge S tr'eet3ANE QLD 4000

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Tel: (07) 2B7 9696(008) 177 172

Fax: (07) 237 9778

Serial No 90/19

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Electoral and Administrative Review Commission

ISBN 0 7242 4177 9

52N6UF

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(i)

PREVIOUS EARC ISSUES PAPERS

90/n

90112

90113

90114

90115

90/16

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Legislative Assembly Electoral Review (April 1990)

Local Authority Electoral Review (April 1990)

Freedom of Information (May 1990)

Judicial Review of Administrative Decisions and Actions (May1990)

Review of Public Assembly Law (May 1990)

Queensland Electoral Roll Review (May 1990)

Review of the Office of the Parliamentary Counsel (September1990)

Local Authorities External Boundaries Review (October 1990)

THE UNIVERSITY OI<' QUEENSlANDLIBRARY

'- d not later than the last date stamped IThis book should be returne . !below, Points/fines may be imposed for late lerum. ------1 i

If!

L36/84

(ii)

PUBUC SUBMISSIONS

The Electoral and Administrative Review Commission seeks written publicsubmissions on its review of public sector auditing in Queensland. The review willculminate in a report to the Chairman of the Parliamentary Committee forElectoral and Administrative Review, the Speaker of the Legislative Assembly andthe Premier.

Written submissions should be sent to the Commission by Friday 22 February,1991. The address for submissions is:

ELECTORAL AND ADMIN1STRATIVE REVIEW COMMISSIONPO BOX 349NORTH QUAY QLD 4002 (Reference 21S)

All submissions received will be available for public inspection at all PublicLibraries, selected Magistrate's Courts and the Commission's Public Reading Roomfrom Monday 4 March, 1991. Comments in response to initial submissions shouldbe sent to the Commission by Friday 29 March, 1991. Such comments in responseto initial submissions will be available for inspection from Monday 8 April, 1991.

Further copies of this Issues Paper can be obtained from:

ELECTORAL AND ADMIN1STRATIVE REVIEW COMMISSION9TH FLOOR, CAPITAL HILL85 GEORGE STREETBRISBANE QLD 4000

PO BOX 349NORTH QUAY QLD 4002

Tel: (07) 2379696 (BRISBANE); (008) 177 172 (COUNTRY)Fax: (07) 237 9778

[)fyi

It,' (J j ,$,i!J1ML

(iii)

CONTENTS

DEFINITIONS

PART I - INTRODUCTION AND mSTORICAL OVERVIEW

1 INTRODUCTION

Review MandateReview ProcessSourcesMinisterial Expenses

2 A BRIEF mSTORY OF PUBLIC SECTORAUDITING IN QUEENSLAND

Early HistoryDevelopments Since 1977

PART II - THE AUDITOR-GENERAL

3 SCOPE OF AUDIT RESPONSIBILITY

Auditing of Statutory BodiesContracting Out to Private Firms

Auditing of Local AuthoritiesBrisbane City Council

4 REGULARITY AUDITING

Financial Management Responsibilities of Departmentsand Statutory Authorities

Audit ResponsibilitiesSystems-Based AuditingDetection of Irregularity and Fraud

5 EFFICIENCY AUDITING

Commonwealth PracticeEfficiency Auditing at State LevelExternal Versus Internal Review

Government EnterprisesProgram Evaluation

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56

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89

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16161718

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2425272829

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6 REPORTING OBUGATIONS OF THEAUDITOR-GENERAL

Reporting to ParliamentState PracticeCommonwealth ReportingEfficiency Audit ReportingSecrecy Restrictions on ReportingParliamentary Scrutiny of

Auditor-General's ReportsReporting to the ExecutiveFollow Up of Auditor General's Reports

7 APPOINTMENT AND TENURE OF THE AUDITOR-GENERAL

8 RESOURCJNG THE AUDITOR-GENERAL'S OFFICE

Resource LevelsResource Allocation ProcessAudit FeesHuman Resource Management Issues

Skill RequirementsRecruitment and Retention of Staff

9 LEGISLATION

PART ill - INTERNAL AUDIT

10 THE NATURE, PURPOSE AND SCOPE OF INTERNAL AUDIT

DefinitionsLegislative MandateAudit StandardsAudit CharterTypes of Audit

Regularity AuditingEfficiency AuditingProgram Evaluation

11 PROFESSIONALISM OF INTERNAL AUDIT

Quality of Internal AuditsStaffing and Development

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PAGE

12 ORGANISATION OF INTERNAL AUDIT 67

Introduction 67Independence 67Involvement in Other Tasks 68Viability of Small Internal Audit Units 69Central Internal Audit Units 70Contract Internal Audit 71Audit Committees 72

13 FRAUD 76

Fraud Prevention and Detection 76Fraud Investigations 77The USA Inspector General Model 79

14 RELATIONSHIP WITH AUDITOR-GENERAL 84

15 SUMMARY 86

16 ISSUES FOR PUBLIC COMMENT 91

BIBLIOGRAPHY 97

(vi)

DEFINITIONS OF TERMS USED rn THIS PAPER

DEFINITIONS:

Auditing

Compliance Auditing

Comprehensive Auditing

Efficiency Auditing(includes Management,Performance, Value forMoney and OperationalAuditing)

A systematic process of objectively obtaining andevaluating evidence regarding assertions abouteconomic actions and events to ascertain the degreeof correspondence between those assertions andestablished criteria and communicating the resultsto interested users (Gill and Cosserat 1989, p.1).

Auditing which involves a review of certainfinancial, accounting or operating activities of anentity for the purpose of determining whether theyconform to specified conditions, nIles or regulations(Gill and Cosserat 1989, p.4).

An approach to auditing which involves systematicexamination of an entity's operations in terms ofregularity and efficiency, effectiveness andeconomy.

Auditing which involves an examination of anentity's operations in relation to specifiedobjectives. The scope of the audit may be the entireorganisation, a program or a subset of these. Thefocus of the audit is to determine whetherresources (personnel, property etc.) are utilised andmanaged efficiently and that administrativepractices, management information systems andorganisational structures are effective.

Some definitions distinguish between efficiencyaudits and effectiveness audits. This Paper makesthe assumption that efficiency auditingcomprehends examination of program effectivenessin meeting specified objectives but does not extendto examination of the appropriateness of programobjectives or of government policy.

External Auditing

Financial StatementAuditing

Internal Audit

Program Evaluation

Regularity Auditing

(vii)

Auditing undertaken by auditors independent ofthe auditee for the purpose of meeting statutoryexternal audit requirements for companies andgovernment bodies (Gill and Cosserat 1989, p.7).

For companies, external audit requirements centreon . examination of financial statements. Forgovernment· agencies, requirements extend toregularity assessments and, in many jurisdictions,efficiency audit.

Auditing which involves examination of an entity'sstatements for the purpose of expressing an opinionon whether they are presented fairly in accordancewith established criteria (Gill and Cosserat 1989,p.5).

The objective of internal audit is to assistmanagement of the organisation in the effectivedischarge of its responsibilities. The internalauditor usually functions in a staff capacity withinthe entity in contrast to the external auditor who isindependent of the client (Gill and Cosserat 1989p.7).

An evaluation of a program in respect of itseffectiveness and efficiency to determine whetherthe program's goals are appropriate, are beingachieved, and resources are optimally allocated andutilised.

Auditing which may comprise financial statementauditing or compliance auditing or both.

ABBREVIATIONS:

ANAO

CJC

Fitzgerald Report

GAO

IOAS

JCPA

PSMC

Report 49

Report 296

(viii)

Australian National Audit Office, Canberra (Officeof the Commonwealth Auditor-General).

The Criminal Justice Commission, Queensland.

Report of the Commission of Inquiry into PossibleIllegal Activities and Associated Police Misconductchaired by Mr Tony Fitzgerald QC.

The General Accounting Office, United States.

The Internal Operational Audit Service establishedin 1980 and abolished in 1987.

Joint Parliamentary Committee of Public Accounts,Commonwealth Parliament.

The Public Sector Management Commission,Queensland.

New South Wales Public Accounts Committee,Report on the New South Wales Auditor-General'sOffice, July 1990.

Report of the JCPA, Auditor-General: Ally of thePeople and Parliament: Reform of the AustralianAudit Office, March 1989.

PART I

INTRODUCTION AND HISTORICAL OVERVIEW

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1

CIIAPrER ONE

INTRODUCTION

1.1 This Issues Paper is the first stage of a review being conducted by theElectoral and Administrative Review Commission (the Commission) intopublic sector auditing in Queensland, specifically:

(a) the functions, powers, practices and resources of the QueenslandAuditor-General; and

(b) the effectiveness of internal audit services.

Review Mandate

1.2 The origins of this review derive from the Report of the Commission ofInquiry into Possible Illegal Activities and Associated Police Misconductchaired by Mr Tony Fitzgerald QC (the Fitzgerald Report) and from theElectoral and Administrative Review Act 1989. Relevant references areoutlined below.

FITZGERALD REPORT

(a) Page 135 - the Report commented on the approaches adopted by theAuditor-General in auditing and reporting on the accounts ofdepartments and instrumentalities and called for these approaches tobe reviewed "if the Auditor-General is to become an effective check onthe abuse of public money". The Report suggested that "TheAuditor-General's office should also be given resources to the extentnecessary for the role to be fulfilled";

(b) Page 135 - the Report commented on the importance of internal auditin providing independent review of operations and systems on behalfof management, and the need for all departments to establish internalaudit programs;

(c) Page 144 - the Report stated that the Commission should, as one of itspriorities, undertake a review of "improved reporting by theAuditor-General and proper resourcing of the Auditor-General's office";

(d) Page 370 - the Fitzgerald Report recommended, among other things,that the Commission should:

(i) implement and supervise a review of:

detailed audit by the Auditor-General of all ministerialexpenditure at least annually, to ensure compliance withpublished guidelines and to report on that audit toParliament; and .

the resources required to enable the Auditor-General toeffectively check the use of public money;

(ii) consider and, where appropriate, make recommendations foradministrative reform including review of the effectiveness ofinternal audit services within government departments andinstrumentalities.

2

ELECTORAL AND ADMINISTRATIVE REVIEW ACT 1989

Section 2.10 - provides that the Commission shall investigate and report onmatters pertaining to public administration specified in the FitzgeraldReport;

Section 2.10(2) - provides that the Commission may investigate and reportinto matters specified in the Schedule to the Act. Included in the Scheduleare:

"3. Expenditure ofpublic moneys;

6. Functions, powers, practices and resources of the Auditor-General, generally, andparticularly in relation to the auditing of systems and controls, detailed auditing ofexpenditures, and his reporting to the Legislative Assembly."

Review Process

1.3 This Issues Paper seeks to identify issues relevant to the review and to seekpublic comment on them by way of written submission.

1.4 Following receipt of submissions, the Commission will review commentsand material. received and may conduct hearings or seminars. The finalstage of the review will be the presentation of a report to the Chairman ofthe Parliamentary Committee for Electoral and Administrative Review, theSpeaker of the Legislative Assembly and the Premier.

Sources for Issues Paper

1.5 The information contained in this Paper is derived primarily from writtensources, including:

(a) annual reports and audit reports of Commonwealth, State andoverseas Auditors-General;

(b) financial administration and audit legislation in Australia andoverseas;

(c) professional commentaries and journal articles; and

(d) reports of reviews into external and internal auditing conductedwithin Australia and overseas.

1.6 The Commission's review of the functions and resources of theAuditor-General is occurring at a time when debate is taking placethroughout Australia on the role of Auditors-General and their relationshipwith Parliament.

1.7 In 1989 a major review into the functions and operation of theCommonwealth Auditor-General and the Australian National Audit Office(ANAO) was undertaken by the Commonwealth Parliamentary JointCommittee of Public Accounts (JCPA). The report on the review wasreleased in March 1989 (referred to in this Paper as Report 296).

3

1.8 The review focussed on many issues relevant to the Commission's inquiryinto the Queensland Auditor-General. These issues include the mandate ofthe Commonwealth Auditor-General in relation to statutory bodies, theAuditor-General's regularity and efficiency auditing functions, the contentand frequency of audit reporting to Parliament, the nature of Parliamentaryinvolvement in the appointment of the Auditor-General and the degree ofcontrol exercised by Parliament over the resources available to theAuditor-General's office.

1.9 Shortly after the Commonwealth Public Accounts Committee tabled itsreview into the ANAO, the New South Wales Public Accounts Committeecommenced a major review of the role of the New South WalesAuditor-General and his or her relationship with Parliament. TheCommittee pursued many of the issues dealt with by Report 296, althoughproceeding from different terms of reference. The Committee released itsReport in July 1990 (referred to in this Paper as Report 49).

1.10 The Northern Territory Public Accounts Committee has also begun a reviewof the role and operations of the Auditor-General of the Northern Territory.

1.11 In September 1990 the West Australian Auditor-General released aDiscussion Paper on issues relating to the independence of his position.The Paper examines many of the matters raised by the Commonwealth andNew South Wales Public Accounts Committees and their applicability toWestern Australia.

1.12 While each of these reviews has its distinct interests, certain themes appearto be emerging. These include:

(a)

(b)

(c)

(d)

a re-assertion of the importance of accountability in public sectorfinancial administration centering on effective reporting of financialstewardship to Parliament;

a perceived need to ensure that public sector audit standards areapplied to the audit of statutory bodies and government corporations;

a perceived need for the Auditor-General to be given adequatelegislative authority and resources to undertake efficiency audits ofgovernment agencies; and

a perceived need for new arrangements to provide more effectiveindependence of the Auditor-General in auditing and reporting on thefinancial stewardship of the government. These arrangements shouldinclude a wider role for Parliament in the appointment process for theposition of Auditor-General and also, according to some perspectives,in the determination of the annual budget of the Auditor-General'soffice.

1.13 These themes are discussed in this Issues Paper as they relate toQueensland.

1.14 In undertaking research for this Issues Paper, the Commission alsoacknowledges assistance received from:

The Auditor-General of QueenslandThe Assistant Auditor-General Policy and Planning, QueenslandThe Commissioner for Review, Public Sector Management Commission

Queensland '

4

The Criminal Justice Commission, QueenslandAssistant Under Secretary (Program and Strategic Review), Queensland

TreasuryAssistant Under Secretary (Financial Services), Queensland TreasuryChief Executives and Internal Audit Managers of Queensland GovernmentDepartments

The Institute of Internal AuditorsThe Director of Research, Public Accounts Committee, Queensland

ParliamentThe Secretary, Joint Committee of Public Accounts, Commonwealth

ParliamentThe Secretary, Public Accounts Committee, Parliament of New South WalesThe Australian National Audit OfficeThe Canadian Audit OfficeThe Victorian Audit Office.

Ministerial Expenses

1.15 The Fitzgerald Report recommended that the Commission undertake areview of procedures for the authorisation and audit of ministerial expenses.

1.16 Since the Fitzgerald Report, the Goss Government has introduced newarrangements for the control and authorisation of ministerial expenditure.In December 1989 Cabinet approved Guidelines for the FinancialManagement of the Office of the Minister. These guidelines were developedto assist Ministers in the financial management of their offices and toensure uniformity in the determination of official expenditure and theaccounting and reporting of that expenditure. The financial managementfunction for each ministerial office is now undertaken by the MinisterialExpenditure Unit of the Treasury.

1.17 While these arrangements are not examined in this Issues Paper, they willbe addressed by the Commission in the course of this review, together witharrangements for audit and audit reporting.

5

CHAPrERTWO

A BRIEF HISTORY OF PUBLIC SECTOR AUDITING IN QUEENSLAND

2.1 This chapter outlines some of the key events that have occurred in thehistory ofpublic sector auditing in Queensland.

Early History

2.2 The concept of external auditing in the public sector is linked with thehistorical stTIlggle in England for supremacy between Parliament and theCrown. As Parliament gained control over the raising of taxes andauthorisation of expenditure, it established procedures to provide assurancethat moneys appropriated for use by the Executive were expended inaccordance with the amounts appropriated and with proper financialmanagement.

2.3 Over time, these procedures centred on:

(a) a requirement for the Executive to report annually to Parliament onits expenditure of Parliamentary appropriations; and

(b) a requirement that the accounts and financial statements of theExecutive should be subjected to verification by a statutory auditorindependent of the Executive and the Parliament.

2.4 These principles were carried over into other Westminster derived systemsof government and are enshrined in the Queensland Constitution Act of1867.

2.5 Under the Constitution Act, responsibility for giving legal sanction to theraising and spending of public moneys rests with the Legislative Assembly(ss.32, 34, 35, 39, 40).

2.6 The Act also provides that the consolidated revenue fund shall be reviewedand audited in such manner as shall be directed by an Act of the Assembly(s.35).

2.7 Queensland's first audit legislation was the Revenue and Audit Act 1861which provided for the establishment of an independent office ofAuditor-General. That Act was subsequently replaced by the Audit Act1874 which remained in force until 1977 when it was replaced by theFinancial Administration and Audit Act 1977.

2.8 Under the Revenue and Audit Act and the Audit Act, the Auditor-Generalwas responsible for the audit of ministerial departments and variousstatutory authorities. In 1936 the Local Government Act 1936 clarified thatthe Auditor-General was responsible for the audit arrangements of allQueensland local authorities, although the Act gave the Auditor-Generalthe right to appoint private auditors to undertake the audit.

6

2.9 In the same year, amendments to the City of Brisbane Act 1924 establishedthat the Auditor-General was to audit the accounts of the Brisbane CityCouncil directly and to report to Parliament on the audit. Since 1936, theAuditor-General's Department has been directly responsible for the audit ofthe Brisbane City Council accounts, while private auditors have beenappointed . by the Auditor-General to audit other local authorities inaccordance with the provisions of the Local Government Act.

2.10 Also in 1936, a separate Department of the Auditor-General was createdwith the Auditor-General as Permanent Head. Prior to 1936, theAuditor-General's Office had been attached to the Chief Secretary'sDepartment.

Developments Since 1977

2.11 In 1977 the new Financial Administration and Audit Act modernisedapproaches to financial accountability by emphasising the directresponsibility of departments for financial management. It did this by:

(a) establishing the concept of the "accountable officer";

(b) specifying the accountable officer's responsibilities for management ofappropriations and for the establishment of appropriate internalcontrol systems;

(c) extending the scope of financial management to include aresponsibility for efficiency and economy;

(d) requiring the accountable officer to consider the establishment of aninternal audit function to assist the accountable officer fulfil his or herresponsibilities under the Act; and

(e) requiring the Auditor-General, as part of the departmental audits, toascertain whether the functions and duties of accountable officers hadbeen adequately and properly performed.

2.12 In 1978 the Auditor-General announced an intention to undertake efficiencyaudits of departmental operations. However, little appears to have come ofthis intention (in 1977 the Bjelke-Petersen Government had indicated thatefficiency review was not a proper function of the Auditor-General but was amatter primarily for accountable officers),

2.13 In 1979 the Auditor-General commenced introduction of systems-basedauditing. This involved a move away from detailed checking of transactionsto review of the financial control systems established by accountable officers.

2.14 In 1980 an Internal Operational Audit Service (IOAS) was established toassist the development of internal audit units within larger departmentsand to provide an internal audit service to smaller departments. Internaloperational audit units were subsequently established in five departments ­Police, Welfare Services, Main Roads, Health and Education.

7

2.15 A particularly significant development in public sector auditing occurred in1985 when amendments to the Financial Administration and Audit Actrequired all statutory bodies as defined by the Act to be audited by theAuditor-General.

2.16 In the following year, the Auditor-General introduced cyclical auditing inpredominantly country areas where this was considered feasible on thebasis of assessed risk.

2.17 In 1987, following the Review of Public Sector Management chaired by SirErnest Savage, the Bjelke-Petersen Government abolished the IOAS andreplaced it with the Government Management Consultancy Bureau whichwas to operate on a user pays basis. The Bureau was disbanded in 1989 bythe Ahern Government.

2.18 Potentially significant changes to Parliamentary scrutiny of governmentaccounting and financial management were introduced in 1988 by theAhern Government with the establishment of a Public Accounts Committeeby Act of Parliament. The Committee was given authority to examinefinancial reports and reports of the Auditor-General and to undertakeinvestigations into agency financial management, including matters raisedin reports of the Auditor-General.

CURRENT REFORMS

2.19 A number of major reforms to financial administration are presently beingimplemented by the Queensland Government. Those with significantimplications for audit include the replacement of the highly prescriptiveTreasurer's Instructions with the less directive Public Finance Standardsand extension of program management initiatives. These reforms arereferred to in more detail in later chapters of this Issues Paper.

PART II

TEE AUDITOR-GENERAL

8

CHAPTERTHREE

SCOPE OF AUDIT RESPONSIBILITY

Auditing of Statutory Bodies

3.1

3.2

3.3

In Queensland, the Auditor-General is required by the FinancialAdministration and Audit Act to audit the accounts of the Treasurer,departmental accounts administered by accountable officers, and theaccounts of all statutory bodies and associated bodies as defined in the Act.

Statutory responsibilities are also placed upon the Auditor-General underActs other than the Financial Administration and Audit Act for the audit ofthe accounts of a small number of statutory authorities.

Since 1985, the principle has been accepted in Queensland that theAuditor-General should be the auditor for all statutory bodies. Thisprinciple was expressed in amendments to the Financial Administrationand Audit Act which state that:

"(1) The Auditor-General shall audit the public accounts and the departmentalaccounts.

(2) Notwithstanding any other Act or law, the Auditor-General shall audit theaccounts ofevery statutory body" (s.57 (1) and (2)).

3.4 The Act also requires the Auditor-General to audit the accounts of a bodyassociated with a statutory body, including a public company within themeaning of the Companies (Queensland) Code.

3.5 In relation to a public company, the Act establishes that theAuditor-General shall be regarded as having been appointed auditor underthe Companies (Queensland) Code but, notwithstanding the Code, cannot beremoved as auditor by the company (s.46I (2)).

3.6 The Act requires statutory bodies to submit their annual financialstatements to the Auditor-General for audit. The Auditor-General mustcertify whether or not:

(a) all the required information and explanations have been received;

(b) the statements are in the required form and are in agreement with theaccounts;

(c) in the Auditor-General's opinion:

(i) the prescribed requirements in respect of the establishment andkeeping of accounts have been complied with in all materialrespects; and

(ii) the statements have been drawn up so as to present a true andfair. view of the transactions and financial position of thestatutory body (s.46G).

9

3.7 The Financial Administration and Audit Act gives the Auditor-General amandate to report annually to Parliament on the audits of statutory bodies.The report:

(a) must state whether the audits have been performed and allcertificates issued as required by the Act or any other ACt;

(b) should draw attention to significant cases where financialadministration has not been properly performed; and

(c) should include particulars of any other matter considered to warrantattention (s.74A).

3.8 While the Financial Administration and Audit Act makes it clear that theAuditor-General is to audit the accounts of all statutory bodies andassociated bodies, the Act does not address audit responsibilities for publiccompanies associated with a department rather than a statutory body.Presently, audit of company entities with which a department is involvedmay occur only where the Auditor-General is invited to carry out the audit.

CONTRACTING OUT TO PRIVATE AUDIT FIRMS

3.9 In recent years, a debate has occurred within Australia about the extent towhich private audit firms should be allowed to undertake audit work forgovernment agencies. Two major issues have emerged:

(a) the extent to which private audit firms could be utilised byAuditors-General to audit financial statements and accounts on theAuditor-General's behalf; and

(b) the extent to which the Auditor-General should be required to competewith private audit firms to undertake audits of government businessenterprises.

Engagement on Behalf of the Auditor-General

3.10 Section 63 of the Financial Administration and Audit Act allows theQueensland Auditor-General to engage a private auditor to undertake anyaudit of a department or statutory body required by the Act (or another Act)to be performed by the Auditor-General.

3.11 Notwithstanding Section 63, most audits of statutory bodies, including theaudits of all the larger statutory bodies, are performed by officers of theDepartment of the Auditor-General. A relatively small number isperformed by private firms.

3.12 The practice of engaging private firms to undertake audits on behalf of thegovernment auditor has been followed in a number of jurisdictions,including Victoria, Western Australia and the Northern Territory. Thepractice has al~o been adopted by the General Accounting Office in theUnited States.

10

3.13 An argument in favour of utilising private firms is the ability to ensureadequate audit coverage where sufficient resources are not available fromwithin the public audit office. In Queensland, private auditors have longbeen used by the -Auditor-General to conduct audits of local authoritiesbecause of distance and resource considerations (see para 3.36).

3.14 However, experience in other jurisdictions points to difficulties that canarise when private sector auditors are contracted to undertake public sectoraudits.

3.15 One difficulty is that specification of the respective responsibilities of theprivate auditor and the Auditor-General has not always been adequate(English 1990, p.18).

3.16 A more significant problem is an apparent failure among some privatecontractors to comply with public sector audit requirements. A recentsurvey by the United States General Accounting Office (GAO) into thequality of audits undertaken by contracted private auditors concluded thatcontractors did not satisfactorily comply with GAO standards on 34% ofgovernment audits. Inadequate testing of compliance with governmentlaws and regulations and inadequate evaluation of internal controls weremajor deficiencies reported (Report 49, p.40).

3.17 It has been suggested that some private auditors do not fully understandthe public sector environment and the differing objectives of private sectorwork. As noted by Walker (1989), public audit work differs from privatesector work by its:

(a) greater emphasis on compliance considerations ie., ensuring thatexpenditure is properly authorised;

(b) greater concern with the operation of internal controls; and

(c) emphasis on public reporting.

3.18 This is not to say, however, that private firms do not have the capacity orwillingness to successfully meet public sector standards. In the NorthernTerritory, all field audit work, including departmental work, is contractedto private auditors. Staff employed in the Auditor-General's office are usedonly for executive tasks, planning and quality control. Recent reporting bythe Auditor-General does not suggest any disquiet with these arrangements.

Competitive Tendering for Government Enterprise Work

3.19 Since 1986, the Commonwealth Government has legislated to allowstatutory marketing authorities and certain government enterprises theoption of choosing private sector audit firms to undertake the audit. Thesemoves have been prompted by a desire to free up regulatory controlsaffecting public sector commercial bodies in the interests of efficiency andcommercial competitiveness.

11

3.20 Commonwealth marketing authorities have been given the option ofappointing a private audit firm to audit their financial statements andaccounts, although the audit must be conducted in accordance with ANAOstandards. Moreover, where an authority chooses the private sector option,the Auditor-General may still conduct their own audit and report onwhether the private firm has complied with ANAO requirements.

3.21 Six Commonwealth transport and communications enterprises have alsobeen established as public companies enabling them, under Commonwealtharrangements, to seek appointment of a private auditor under theCompanies Code. Where the enterprise appoints a private firm, theAuditor-General has no authority over the auditing and reporting process.

3.22 In terms of accountability to Parliament, Report 296 considered that thenew auditing arrangements for marketing authorities and governmententerprises were unsatisfactory. In respect of arrangements for marketingauthorities, the Report contended that:

(a) the private auditor is not required to report to Parliament on audits ofthe authority's accounts, only to the responsible Minister; by contrastwhere the Auditor-General audits the accounts he is able to report toParliament directly on any significant issues arising from hisinspections; and

(b) the Auditor-General will not be in a position to decide whether aseparate audit into the financial statements is required until afterreceipt of the private auditor's report; this could lead to significantdelay in the Auditor-General reporting to Parliament on any identifiedproblems (Report 296, pp.90-91).

3.23 With regard to government enterprises, Report 296 observed that, underthe Companies Code, there is no requirement:

(a) for the auditor to report on whether proper records and accounts havebeen kept in accordance with the law and on the adequacy of internalcontrols;

(b) for the Minister to table in Parliament the enterprise's financialstatements and the associated audit report; or

(c) for the auditor to report directly to Parliament on significant caseswhere accounting procedures and controls have been deficient ( theReport suggested that public reporting of such matters by privatesector audit firms is rare).

3.24 Consequently, there was concern that Parliament would no longer receivereports on waste, misappropriation or inefficiency as a matter of course, andwould be less likely to receive reports on whether Commonwealth bodieshave broken their own legislation or other laws (Report 296, pp.99-100).

3.25 The Commonwealth Auditor-General has also expressed concern aboutthese new arrangements in public statements (ANAO 1989a, p.17; ANAO1989b, p.4).

12

3.26 In light of the JCPA's concerns and those of the Auditor-General, Report296 recommended that Commonwealth legislation reaffirm that theAuditor-General is the external auditor of all Commonwealth agencies,including government business enterprises, statutory marketing authoritiesand public companies. The Auditor-General should have discretion,however, to contract with a private sector auditor to undertake an audit onthe Auditor-General's behalf in accordance with audit and reportingstandards approved by the Auditor-General (Report 296).

3.27 In its initial response to Report 296, the Hawke Government indicated ageneral willingness to accept the recommendation but deferred the matterfor further review by the former South Australian Auditor-General MrSheridan. Mr Sheridan's subsequent report recommended that theAuditor-General's mandate over government marketing authorities andenterprises should be restored (ANAO 1990b, pp.18-19). The Governmenthas not yet responded to Mr Sheridan's report.

3.28 Some private sector audit firms have criticised the recommendations ofReport 296 which are seen as preventing private firms competing openlywith the ANAO, insulating the ANAO from the disciplines of the marketplace and preventing government enterprises from utilising the particularexpertise developed by private firms in the area of commercial accounting(English 1990, p.19).

3.29 In respect of reporting, one private practitioner has commented:

Hall that needs to be changed are the ground rules. Appropriate legislation could beamended to require the private auditors to report to Parliament ... accountability toparliament is possible within a competitive framework" (English 1990, p.19).

3.30 It may be asked, however, whether a private audit firm is in as strong aposition to report to Parliament on sensitive matters without the statutoryprotections of the Auditor-General.

Some State Perspectives

3.31 Following perceived deficiencies in the accountability arrangements ofcertain government enterprises and investment activities in WesternAustralia, the Western Australian Government has adopted the principlethat the Auditor-General should be the auditor for all government agenciesand their subsidiaries (ANAO 1989a, p.14).

3.32 In New South Wales, the Auditor-General is the statutory auditor of allgovernment owned corporations. Their financial statements and theAuditor-General's report are prepared in accordance with the requirementsof the Companies (New South Wales) Code, but the Auditor-General isempowered to report to Parliament on any matter arising from the audit(Report 49, p.13).

3.33 The New South Wales Public Accounts Committee has recommendedcontinuation of these arrangements with the proviso that auditees shouldbe able to recommend to the Auditor-General the appointment of a privatesector audit firm on contract to the Auditor-General. It should be theprerogative of the Auditor-General to accept or reject the recommendationhaving regard to the circumstances (Report 49, p.57).

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3.34 In Queensland, the Goss Government has released a Green Paper whichforeshadows the Government's intention to place Queensland Governmenttrading enterprises on a commercial basis· through a policy ofcorporatisation. One of the options being considered is giving governmententerprises the choice of appointing a private auditor or theAuditor-General as the authority's auditor.

Comment is sought on:

(a) whether audit legislation should require the Auditor-General to auditthe accounts of a public company associated with a department;

(b) whether all government-<>wn.ed enterprises established by theQueensland Government should be audited by the Auditor-General orbe allowed to choose their own auditor;

(c) whether governm.ent enterprises should be audited according to therequirements of the Companies Code or standards similar to thoseapplying to the audit of statutory bodies;

(d) the merit or otherwise of allowing the Auditor-General to engageprivate audit firms for the audit of statutory bodies and governmentdepartments where the Auditor-General is the statutory auditor; and

(e) the appropriate procedures to enable the Auditor-General to engageprivate contractors and to monitor their performance in meeting publicsector audit standards.

Auditing ofLocal Authorities

3.35 Since the beginnings of local authority administration in Queensland, theAuditor-General has exercised responsibilities for audit of local authorities.

3.36 By the 1930s, a practice was well established that allowed theAuditor-General to appoint private firms to undertake audits in accordancewith general standards established by the Auditor-General. The practice ofutilising private, usually local, firms was adopted because of the perceivedimpracticalities of using Brisbane based officers from the Auditor-General'soffice.

3.37 However, prior to 1936, accounting and audit arrangements were containedin various pieces of legislation. Differences occurred in accounting practicesbetween local authorities and in the degree of audit reporting on themanner in which the accounts had been kept. Accordingly, the ForganSmith Government introduced standard arrangements for financialmanagement and audit by means of the Local Government Act.

3.38 The Act required the keeping of all accounts by local authorities, gavepower to the Auditor-General to recommend regulations to theGovernor-in-Coupcil prescribing appropriate accounting standards, andauthorised the Auditor-General to appoint either private auditors orauditors from the Department of the Auditor-General to undertake theaudits.

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3.39 Since 1936, the Auditor-General has continued to rely on private firms toundertake the majority of local authority audits. Under the LocalGovernment Act, all private auditors appointed by the Auditor-Generalmust be drawn from a pool of auditors registered with the LocalGovernment Auditors Board of which the Auditor-General is the Chair.These auditors must have attained a certain level of professional knowledgeand certification.

3.40 Although the auditor is appointed by the Auditor-General, the appointeeremains the auditor in his or her own right and is not an agent of theAuditor-General in the manner of an auditor appointed under the FinancialAdministration and Audit Act.

3.41 However, under Section 74A of that Act, the Auditor-General is required toreport to Parliament on the audits of local authorities in the same manneras for audits of statutory bodies (see para 3.7).

3.42 To enable this to be done the Auditor-General has introduced certainquality control measures:

(a) for each appointment a letter of engagement is required whichdetermines the audit fee and outlines requirements in relation tos~1;>missionof an audit plan and audit reports;

(b) the auditor's proposed audit plan is reviewed before commencement ofthe audit. Included in the plan is an assessment of areas ofmateriality and risk and proposals for examination of internal audit;

(c) separate reports on the accounts and audit procedures adopted aresubmitted by each auditor following the audit;

(d) the auditor's working papers are available for inspection by theDepartment;

(e) approximately 12 local authorities and joint local authorities per yearare audited directly by officers of the Department of theAuditor-General and any deficiencies in previous audits reported; and

(f) an auditing handbook for auditors and a guide on internal controlprocedures for local government clerks have been issued by theAuditor-General.

3.43 In November 1989 the Department of Local Government issued a discussionpaper on its review of the Local Government Act. The paper foreshadowed apossible freeing up of State Government controls over the administrationand financial administration of local authorities. The Paper also suggestedthe need for adoption of updated financial management and accountingpractices by local authorities.

3.44 The Paper considered that provisions of the current law which make theAuditor-General responsible for local government audits be continued (LocalGovernment Act Review, p.38).

Comment is invited on the adequacy and appropriateness of presentarrangements for external audit of local authorities.

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BRISBANE CITY COUNCIL

3.45 In 1936, the Forgan Smith Government amended the City ofBrisbane Act torequire audits of the Council's accounts to be undertaken directly by theAuditor-General and to require the Auditor-General to report separately toParliament on the audit.

3.46 The decision of the Government arose from Government and communitydisquiet at the time over deficient budgetary and accounting practices and abelief that the State Government needed to assert greater control over theaccounting and audit standards exercised by the Council (Greenwood andLaverty [n.d.], pp.504-505).

3.47 These arrangements were instituted over fifty years ago. An issue iswhether it is necessary for the Auditor-General to have direct responsibilityfor the conduct of audits of the Brisbane City Council in order to ensureeffective accountability.

Comment is invited on present arrangements for external audit of theBrisbane City Council.

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CHAPTER FOUR

REGULARITY AUDITING

4.1 The following two Chapters examine, firstly, how 'Auditors-Generalapproach the audit task and, secondly, raise issues about the general auditapproaches adopted in Queensland. .

4.2 This Chapter deals with regularity auditing. Efficiency auditing isexamined in Chapter Five.

Financial Management Responsibilities of Departments and StatutoryAuthorities

4.3 Under Sections 36 and 46C of the Financial Administration and Audit Act, .accountable officers and statutory bodies are responsible, among otherthings, for:

(a) establishment and maintenance of accounts in accordance with the Actand the Public Finance Standards;

(b) ensuring that expenditure is incurred for lawful purposes and incompliance with prescribed standards; and

(c) ensuring that internal controls and checks provide adequatesafeguards with respect to:

(i) the correctness, regularity and propriety of payments made;

(ii) the assessment, levy and collection of revenue and other amountsreceivable, the receiving, safe keeping, banking of and accountingfor the moneys and the proper accounting for property; and

(iii) the prevention of fraud and mistake.

4.4 The Act requires accountable officers and statutory bodies to prepareannual financial statements showing the transactions of the agency for theprevious financial year and the financial position at the close of the year.Following certification by the Auditor-General, the financial statements aretabled in Parliament. Departmental statements are tabled by theTreasurer. The financial statements of statutory bodies are incorporated intheir annual reports which are tabled in Parliament by the responsibleMinister.

4.5 The Act also further requires the Treasurer to prepare an annual statementin respect of the public accounts.

Audit Responsibilities

4.6 . The Auditor-General is required by the Financial Administration and AuditAct to audit the accounts of departments and statutory bodies and thepublic accounts maintained by the Treasurer, and the Treasurer's annualstatement and financial statements produced by accountable officers andstatutory bodies.

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4.7 The type of audit undertaken is basically a regularity audit centering onfinancial and compliance issues:

"This type of audit ... determines whether financial operations were properlyconducted (ie were technically regular); whether there has been compliance withrelevant financial laws (ie, whether expenditure was covered by appropriation andthe like),' and whether the financial statements are prol?erly drawn up so as topresent a true and fair view of the finances. It is an audzt to ascertain whether alllegal or other requirements of financial control have been observed" (QLDTreasury 1982, p.181).

SYSTEMS-BASED AUDITING

4.8 In earlier times, regularity auditing in the public sector involved detailedchecking of financial transactions undertaken by auditees.

4.9 In the past twenty to thirty years, this approach has been largelyabandoned by most auditors in favour of investigations into the adequacyand appropriateness of financial control systems established by agencymanagement. .

4.10 The change from transaction-based to systems-based auditing has arisenfrom the vast growth and complexity in agency transactions, the extent ofcomputerisation, the frequency of new systems and the high cost of auditingbased on transaction checking.

4.11 Initially, many audit offices attempted to examine and verify all agencycontrol systems during the course of a financial year. More recently, auditoffices have been adopting 'risk assessment' approaches which give priorityto the audit of systems having relatively high financial significance('materiality') and potential risk ('exposure').

4.12 The Queensland Auditor-General commenced introduction of systems-basedauditing in 1979. In 1981, amendments to the Financial Administrationand Audit Act empowered the Auditor-General to adopt, at will, a cyclicalapproach to systems review. The 1982 Guide to Public FinancialAdministration in Queensland observed that:

"Under such an approach, where the Auditor-General is satisfied that with respect toa branch, section or activity -

(a) adequate internal control is exercised by the department concerned; and

(b) the scale of operations or financial transactions do not materially influence thoseof the department concerned as a whole,

such branch, section or activity may be audited only once during a cycle of severalyears. However, the Auditor-General has indicated to the accountable officers of theseveral departments that the concept of cyclical audit will not be implemented byhim until he is satisfied that proper internal controls have been established bydepartments and that such controls are functioning efficaciously" (QLD Treasury1982, p.183).

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DETECTION OF IRREGULARITY AND FRAUD

4.13 An issue is whether present systems based auditing approaches providesufficient coverage of agency operations to enable the Auditor-General toreach a conclusion on the degree of compliance with appropriate legislationand standards.

4.14 In the past few years, concerns have been raised in many jurisdictionsabout this issue. Much of the concern appears to have centred on the abilityof systems based auditing to assist in tackling the specific problem of fraudwhich has been defined as:

"misappropriation of assets or intentional misrepresentations of financialinformation by one or more individuals among management, employees, or thirdparties. Fraud may involve:

(i) manipulation, falsification or alteration of records or documents;

(ii) suppression or omission of the effects of transactions from records ordocuments;

(iii) recording of transactions without substance;

(iv) misapplication of accounting policies" (Humphry 1988, p.68).

4.15 Official concern over the incidence of fraud in government and the adequacyof detection and prevention approaches has become a general onethroughout Australia. In respect of the Commonwealth, Report 296 noted:

"Ten years ago fraud in government was far less of an issue. Nowadays, however,the fear and prevalence of fraud in the public sector increases the need both for moreeffective systems of financial control and for external audit of government moneys"(Report 296, p.35).

4.16 In a 1988 journal article, the then Victorian Auditor-General, Mr R.G.Humphry, cast doubt on whether modern systems approaches give adequateattention to the issues of fraud, waste and mismanagement in the publicsector, pointing out that:

"identified frauds in the public sector have not been fully detected by structuredaudit programs and management control systems but often by 'tip-offs' and chancecircumstances" (Humphry 1988, p.71).

4.17 Commenting on the issue of irregularity and fraud in the same journal, theformer Queensland Auditor-General, Mr V.C. Doyle, observed:

"The distinguishing and, to some extent, worrying feature of [systems-basedauditing} was that because of its highly judgmental nature and despite the degree ofprofessional knowledge and skill behind the judgments it was no longer possible forauditors to provide certificates implying unequivocal guarantees as to the probity ofan organisation's activities or the complete accuracy of its records and accounts.

The object of audit became the formation of professional opinions on the mattersaddressed and the certificates and reports of audit became expressions of thoseopinions" (Doyle 1988, p. 74).

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4.18 The Fitzgerald Report also commented on modern audit approaches asadopted in Queensland, suggesting that:

nne [Queensland] Auditor-General has not concentrated upon the discovery of errorsor improprieties in the general decision-making process of the departments andinstrumentalities which have been audited. The primary concern of theAuditor-General has been to monitor and improve internal financial systems andcontrols. Limited attention has been paid to specific items of expenditure" (p.135).

4.19 Part of the challenge for public auditors in fulfilling their regularity auditresponsibilities is the increasing adoption of risk management approachesin government agencies.

4.20 Risk management is being adopted by governments as part of a generalmove to free up central financial controls and devolve more effectivedecision-making to line management. Managers are being encouraged todevelop financial control systems appropriate to their particular operatingenvironments within general standards laid down by the central financeagency. Part of this involves managers making assessments about the costsof maintaining particular controls against the costs of likely risks.

4.21 In Queensland, the recent replacement of the Treasurer's Instructions withthe Public Finance Standards is consistent with trends in other States andoverseas to reduce detailed financial management controls in favour of moregeneral operating principles.

4.22 Risk management requires external auditors to be sensitive to theindividual operating environments of auditees and to assist management todevise appropriate controls without necessary reliance on past procedures.However, there is a perception that risk management can increase thepossibility of irregularity and fraud or, at the least, require moresophisticated approaches by the auditor to reviewing compliance with thelaw and accounting standards.

New Audit Approaches to Fraud Detection

4.23 A number of jurisdictions have been introducing new external auditapproaches to identify areas of risk within an organisation and to addressissues of fraud and irregularity. Generally, these are variants of thesystems model.

4.24 One approach adopted in Queensland is to train audit staff to be alert forpossible signs of fraudulent activity encountered during systems audits.Possible signs include high rates of employee turnover in accounting areas,failure to reconcile bank accounts, and business dealings with no apparenteconomic purpose (Doyle 1988, p.75).

4.25 In 1986/87 the Queensland Auditor-General also introduced a cyclicalprogram of regularity audits into particular aspects of financialadministration such as tendering and contracting procedures, andadministration of grants and subsidies. Results of these audits are reportedto management. and briefly summarised in the Auditor-General's AnnualReport to Parliament.

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4.26 Further, the Financial Administration and Audit Act permits theAuditor-General to make a special report to the Legislative Assembly onany matter arising out of an audit to which, in the opinion of theAuditor-General, attention should be drawn (s.75(2)).

4.27 This type of provision has been used by the Auditor-General to report to.Parliament on investigations into agency management undertaken inresponse to specific allegations or concerns. An example is the 1983investigation into the letting of a contract by the Queensland ElectricityGenerating Board in connection with the Stanwell Power Station. However,investigations of this kind do not appear to have been frequentlyundertaken or reported.

4.28

4.29

Limits of Audit Responsibility for Detection of Fraud

A related question concerns how much responsibility the external auditorbears for the detection of financial irregularity and fraud compared withthat of other authorities.

The general view of the accountancy profession is that primaryresponsibility for establishing effective systems of financial control lies withmanagement, not the external auditor. The former South AustralianAuditor-General, Mr Sheridan, has expressed the view of the professionthat:

"there is misconception and unreasonable expectation by management and the publicgenerally in the role of the external auditor in the detection of fraud.

An external auditor has a responsibility to ensure that management practices andcontrols are in place and operating to prevent or minimise the risk of fraud. Anexternal auditor could be held accountable if deficiencies exist which have not beenbrought to the attention of management ...

Notwithstanding the auditor's role, the implementation and ongoing monitoring ofsuch controls is a responsibility of management. Management cannot rely on theperiodic visits of external auditors to identify areas where controls are not in place,or are bypassed, which expose them to the on-going risk of fraud" (SAAuditor-General 1989, p.8).

4.30 The view that prevention of irregularity and fraud is primarily theresponsibility of management is reflected in modern public administrationlegislation.

4.31 The Queensland Financial Administration and Audit Act places theresponsibility on departmental accountable officers and statutory bodies toensure that procedures within the organisation "at all times" affordadequate safeguards with respect to the regularity of transactions and theprevention of fraud or mistake (ss.36(1)(d) and 46C(e)).

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4.32 The role of the Auditor-General is to audit agency accounts in such manneras he or she thinks fit, having regard to the character of the internalcontrols and internal audit procedures established by agency management(s.57A Financial Administration and Audit Act). The Auditor-General isalso required by the Act to certify whether departmental statements andthe financial statements of statutory bodies are in the required form andagree with the accounts and, further, whether the prescribed requirem.entsin respect of the establishment and keeping of the accounts have beencomplied with (ss.37(3) and 46(G)). Additionally, the Auditor-General isrequired to include in his or her annual report to Parliament any significantcases where the duties of accountable officers have not been adequatelyperformed (s. 74).

Challenges to the Contemporary View

4.33 The contemporary view that external audit bears only limited responsibilityfor detection and prevention of fraud has been challenged in the UnitedStates in relation to the role of private sector financial reporting.

4.34 The 1987 National Commission on Fraudulent Financial Reporting(Treadway Commission) recommended that generally accepted auditingstandards should be changed to recognise the auditor's responsibility fordetecting fraudulent financial reporting and that auditors should takeaffirmative steps to assess the potential for its occurrence (Humphry 1988,p.70).

4.35 Prior to the Treadway Commission, the United States Federal Governmenthad already undertaken significant changes to fraud investigationarrangem.ents in Federal Government agencies by the appointment ofInspectors-General to individual agencies. The Inspectors-General combineinternal audit functions with fraud investigation utilising audit standardsestablished by the General Accounting Office (see para 13.14).

4.36 It is worth noting another USA innovation, the Fraud Hotline. This wasestablished administratively within the GAO in 1979. It centres on anationwide toll-free Hotline, which receives information from any personconcerning fraud, waste or mismanagement by or within the FederalGovernment. After filtering, the allegations are referred by the GAO to theappropriate Federal agency for investigation. The GAO takes ultimateresponsibility for ensuring that allegations have been investigated properlyand that appropriate law enforcement action has been taken (McMillan1988, p.122).

4.37 In Queensland, a significant new mechanism for investigation of specificallegations of official misconduct is the Criminal Justice Commission(CJC). The CJC has statutory responsibility for investigating all cases ofalleged or suspected misconduct by persons holding appointments in Stateand Local Government (s.2.20(2)(e)(ii) Criminal Justice Commission Act1989). Misconduct includes conduct affecting the honest discharge offunctions, breach of trust, misuse of information and material, and conductwhich might constitute a criminal offence or grounds for dismissal from thepublic service (s.2.23 Criminal Justice Act 1989).

4.38

4.39

4.40

4.41

4.42

4.43

4.44

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The CJC was established following a recommendation of the FitzgeraldReport. However, the CJC's functions in relation to misconduct should notbe regarded as a substitute for surveillance of departmental financialoperations by the external auditor.

The Fitzgerald Report appeared to consider the Auditor-General acomplementary but equally important check on irregularity and fraud. Therecommendation of the Report that audit and reporting approaches adoptedby the Auditor-General should be reviewed "if the Auditor-General is tobecome an effective check on the abuse of public money" (Fitzgerald Report1989, p.135) should be viewed in this context.

However, it may be asked whether any changes to present audit coverageand methodology would significantly enhance the capacity of theAuditor-General to assist in the prevention of fraud and irregularity, takinginto account the responsibilities of management, internal audit and lawenforcement authorities.

It would seem impractical for the Auditor-General to return totransaction-based approaches in any substantial form;. certainly such amove would probably require significantly increased resources. The generalopinion within the accountancy profession appears to be that systems-basedauditing remains a more cost effective approach, particularly when manyinstances of irregularity and fraud are attributable to breakdowns infinancial control systems.

A more relevant question might be the extent to which reliance should beplaced on cyclical approaches where financial systems having low financialsignificance and assessed risk are reviewed infrequently.

In Queensland, most of the cyclical auditing undertaken by theAuditor-General occurs in country centres where materiality and risk areconsidered to permit this. By definition, such an approach cannot provideassurance that all financial systems of an agency have been investigated bythe external auditor in the course of a financial year. An issue is whethersuch an approach may, in some circumstances, expose less financiallysignificant operations to greater risk.

Should this be the case - and the Commission invites comment on this - thequestion must still be asked whether more frequent audit of such systemswould be justified in cost benefit terms. There is a view that auditprograms are expensive and that efficient use of audit resources requiresthat priority be given to the audit of systems whose poor design, breakdownor fraudulent misuse would carry greater financial significance for thetaxpayer.

Comment is invited on:

(a) the ability of present external audit approaches in the Queenslandpublic sector to ensure compliance with the law and financialaccountability; and

(b) any chaD.ges that could or should be inlplemented to strengthencurrent approaches.

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4.45 The ability of external audit programs to undertake cyclical approaches alsodepends in part upon the quality of internal audit procedures established bythe auditee. The responsibilities of management and internal audit forsurveillance of internal controls and for the prevention of irregularity andfraud is discussed further in Chapter Thirteen.

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CHAPTERFNE

EFFICIENCY AUDITING

5.1 Put simply, efficiency auditing looks at the relationship between operationsor services (outputs) and the resources (inputs) used to produce theseservices. The focus is very different from the traditional regularity auditwhich focusses on attestation of financial statements and compliance withaccounting standards and other prescribed standards.

5.2 Efficiency audits attempt to examine how efficiently a particular service oroperation is achieving its objectives taking into account such matters asclarity of objectives, resource utilisation, appropriateness of managementplanning and control systems, contracting and tendering options andprocedures, and a range of other matters that are perceived by the auditorto affect the performance of the operation.

5.3 In Australia, the concept of efficiency auditing was introduced into publicadministration in the 1960's. Academic and media interest in the practicehas centred on the Commonwealth where the ANAO undertakes asignificant and highly publicised program of efficiency audits into theoperatiqns of government departments and authorities. However, a numberof State Auditors-General also undertake efficiency audits.

Commonwealth Practice

5.4 At Commonwealth level, the impetus for efficiency auditing came from arecommendation of the 1976 Royal Commission on Australian GovernmentAdministration (Coombs Commission).

5.5 The Coombs Commission envisaged the establishment of a regular programof efficiency audits into departments and authorities. Audit reports wouldbe designed to bring before Ministers, Cabinet and Parliament "both theassessment itself and the data on which it is based". Reporting on auditresults to the Executive and to Parliament "would clearly establish theprimacy of political responsibility for administrative efficiency, including notmerely that of the minister and Cabinet but also that of Parliament" (Report296, p.130).

5.6 In response to Coombs, the Fraser Government amended theCommonwealth Audit Act 1901 in 1979 to give authority to theAuditor-General to undertake efficiency audits into the operations ofdepartments and statutory authorities "at such intervals as he thinks fit"(s.48C(1) Audit Act).

5.7 The Auditor-General was also authorised to conduct efficiency audits ofpublic companies, although only at the request of a Minister or byresolution of both Houses of Parliament.

5.8 Initially, efficiency audits conducted by the ANAO were undertaken asdiscreet projects by a separate efficiency audit division. In 1984 thedivision was abolished and responsibility for conducting efficiency reviewsgiven to project branches within the ANAO (Adams 1986, pp.193-194).

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5.9 As part of this move, project branches were required to undertake acomprehensive approach to auditing involving systematic examination ofeach auditee in terms of both regularity and efficiency. In practice, becauseof resource limitations, the ANAO has devoted substantially more effort toregularity reviews than efficiency reviews.

5.10 The ANAO also undertakes "project performance audits" which are smallerscale efficiency audits undertaken under a separate section of the Audit Act.

Efficiency Auditing at State Level

5.11 In 1987, the South Australian Auditor-General was given explicit authorityunder the South Australian Public Finance and Audit Act 1987 to examinethe efficiency and economy with which departments and statutoryauthorities use their resources.

5.12 The extent of program activities audited does not appear to be as extensiveas in the Commonwealth. Audits tend to be on the scale of Commonwealthproject audits with some involving little more than making suremanagement is aware of the financial impact of their decisions (SAAuditor-General 1989, p.6).

5.13 The Western Australian Financial Administration and Audit Act 1985authorises the Auditor-General to conduct value for money audits and toaudit performance indicators developed and reported by management(Report 49, p.69).

5.14 The Victorian and New South Wales Auditors-General have undertakenefficiency audits. However, their statutory authority to do so has beenchallenged in the past.

5.15 In Victoria, the issue of mandate came to a head in March 1989 when theSpeaker of the Legislative Assembly questioned whether an efficiencyreport on Financial Assistance to Industry forwarded by theAuditor-General could be legally tabled under the Victorian Audit Act 1958.Subsequent advice from the Solicitor-General confirmed the position of theSpeaker and questioned the legal authority of the Auditor-General toconduct audits other than financial statement audits.

5.16 In response to the mandate difficulties, the Cain Government amended theAudit Act, among other things to give explicit authority to theAuditor-General to conduct efficiency audits. The relevant provision states:

"The Auditor-General may, at such intervals as he or she thinks fit, conduct anyaudit he or she considers necessary to determine whether a Department or publicauthority is achieving its objectives effectively and doing so economically andefficiently and in compliance with all relevant Acts" (sA8A( 1) VIC Audit(Amendment) Act 1990).

5.17 The New South Wales Public Accounts Committee has recommended thatthe New South Wales Auditor-General be given explicit authority to conductreviews into the economy, efficiency and effectiveness with which anauditee has used its resources (Report 49, p.83).

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QUEENSLAND

5.18 In introducing the Financial Administration and Audit Act into Parliamentin 1977, the Bjelke-Petersen Government noted that the philosophy of theAct was to make accountable officers, assisted by internal audit, primarilyresponsible for the efficient and economical management of theirappropriations. The Government's view was that it was not appropriate togive an efficiency audit function to the Auditor-General as this mightconflict with the responsibilities of management for program review(Hughes 1980, p.215).

5.19 In a 1978 conference paper, the then Auditor-General, Mr Peel, noted theintention of the Act to make accountable officers responsible for economyand efficiency. However, Mr Peel also observed that Section 62(a) of the Actcharged the Auditor-General with responsibility for ascertaining whether ornot the accountable officer had adequately discharged required duties,including those covering efficiency and economy (Hughes 1980, p.215).

5.20 To enable the Auditor-General to undertake this responsibility, Mr Peelindicated that his staff would be conducting efficiency audits intodepartmental operations. These audits would look firstly at the means andextent to which the department was examining the efficiency of itsoperations and whether this examination was effective and, secondly, wouldconduct an independent appraisal of the economy and efficiency of thedepartment's financial affairs (Hughes 1980, p.215).

5.21 In the late 1970s/early 1980s, two efficiency type audits into departmentaloperations were conducted and published by the Department of theAuditor-General. However, the Department did not appear to havecontinued with any significant efficiency review activity.

5.22 In his 1985 Report on the Treasurer's annual statement, the thenAuditor-General, Mr Doyle, indicated that his Department would be payinggreater attention to systems causing waste or inefficiency in accordancewith the principles of Section 62 (a) of the Act:

"although my Department does not conduct full scale efficiency audits per se, ...authorised auditors will in future be required, in the course of their financial andcompliance audits, to pay greater attention to the identification of systems,procedures and administrative processes which could be conducive to or are causingwaste, extravagance or any other form of inefficient usage of resources, and to bringsuch to the notice of auditee management" (QLD Auditor-General 1985, p.3).

5.23 At the same time, the Auditor-General re-emphasised that, under thephilosophy of the Financial Administration and Audit Act, the primaryresponsibility of the external auditor was to examine and report upon theefforts of accountable officers themselves to institute appropriateperformance review systems.

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5.24 In the same year, Section 62(a) of the Act, which required theAuditor-General to report on the performance of accountable officers infulfilling their financial management responsibilities, was repealed andreplaced by Section 37(3). From the Commission's perspective, theamendment appears to have reduced the mandate of the Auditor-General toexamine the performance of accountable officers in terms of efficiency, asSection 37 merely requires the Auditor-General to certify whether thedepartmental statements are true and fair and that the statements andaccounts comply with prescribed requirements. In other words, Section 37appears to have an essentially regularity focus (on the other hand, the 1985amendments retained Section 74 of the Act which requires theAuditor-General to inform Parliament of significant instances where thefunctions of accountable officers have not been adequately discharged).

5.25 In June 1987, the Review of Public Sector Management (Savage Committee)recommended that the Auditor-General be given the responsibility andresources to conduct independent external efficiency audits into governmentdepartments. The recommendation was rejected by the Government onsimilar grounds to those expressed in 1977 (QLD Treasurer 1987).

5.26 The recommendation of the Savage Committee was also rejected by theAuditor-General. In his 1987 Annual Report to Parliament, Mr Doylecommented:

"1 have opposed the conduct of efficiency audits per se by my Department for anumber of reasons, not least of which is a lack of conviction that the function itselfwould measure up favourably in value for money terms by bringing aboutimprovements in efficiency and economy generally that are not achievable within theframework of existing management, audit and operational mechanisms" (QLDAuditor-General 1987, p.15).

External versUs Internal Review

5.27 A key issue is whether an efficiency auditing function for .theAuditor~General would indeed conflict with the proper responsibilities ofmanagement for performance review.

5.28 In Canada, the Commonwealth and certain other jurisdictions where theAuditor-General has been given responsibility for efficiency auditing, aprimary consideration has been the importance placed on independentscrutiny external to the agency and the principle that key findings shouldbe open to Parliamentary and public review.

5.29 In these jurisdictions, it appears that external efficiency auditing has grownalongside developments in performance review activities by agencymanagement and has tended to be seen as complementary rather thanduplicatory. Where doubt has been raised about external efficiency audits,the debate has tended to be over:

(a) the extent to which external efficiency audits should be conducted intothe operations of government enterprises which operate on acommercia'! footing; and

(b) the extent to which efficiency auditing should be able to encompassprogram evaluation.

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GOVERNMENT ENTERPRISES

5.30 The Hawke Government has taken the position that external efficiencyaudits into Commonwealth enterprises are not justified as improvements inperformance indicators and annual reporting procedures of these bodies willensure that sufficient information is provided to Parliament on theirperformance. As well, the pressures of the market place will providegreater incentive for government enterprises to review their operationalefficiency without the need for external review (Report 296, Chapter 12).

5.31 In line with this perspective, the Hawke Government has decided to removethe power of the Commonwealth Auditor-General to conduct efficiencyreviews of all government enterprises, including public companies, exceptwhere permission is obtained from the responsible Minister (ANAO 1989b,p.3).

5.32 Prior to this decision, Report 296 had also considered the issue butconcluded that good reasons existed for allowing external efficiency auditsinto government enterprises:

"Often ... a hard working management may not know how to raise efficiency. TheDOF [Department of Finance} may perceive that GBE or company efficiency is lowerthan expected but not have the expertise or time to assist it to improve itsperformance. Because of the strategic importance in the economy of the GBE,statutory authority or company, the Government has a vested interest in raising theorganisation's efficiency and in reducing the organisation's chance of not achievingits objectives. In this situation two approaches are open to the organisation and toGovernment:

a management review; or

a performance audit.

Both of the above would attempt to identify reasons for the low performance andcould make suggestions about how the latter could be raised. The difference betweenthe two approaches is that the first may be sponsored by the organisation'smanagement and the second by the organisation's owner, that is by the governmentand, ultimately by taxpayers." (Report 296, pp.174-175).

5.33 In contrast to the Government's subsequent decision, the JCPArecommended an extension of the Auditor-General's efficiency auditmandate by:

(a) amending audit legislation to require the Auditor-General toundertake a cycle of efficiency audits into all government activities;

(b) providing resources to the Auditor-General to allow audits to beconducted into all programs with expenditure or revenue greater than$10m in accordance with the following cycle:

(i) a 20 year cycle for government companies;

(ii) a 10 year cycle for statutory authorities;

29

(iii) a 5 year cycle for departmental commercial undertakings;

(iv) a 5 year cycle for departmental outriders; and

(v) a 3 year cycle for departments;

(c) allowing the Auditor-General to undertake efficiency audits into publiccompanies and government enterprises without having to obtainministerial permission (Report 296, Chapters 12 and 17 ).

5.34 In Victoria, the State Government has given legislative authority to theAuditor-General to conduct efficiency reviews into all public authoritieswith the exception of the State Bank of Victoria.

5.35 In Queensland, the Goss Government IS reVleWlng the possibleestablishment of government enterprises and has raised the questionwhether the Auditor-General should be the auditor (see para 3.34). In thiscontext, an issue is whether external efficiency reviews should be conductedinto such enterprises and, if so, whether this role should be performed bythe Auditor-General.

PROGRAM EVALUATION

5.36 The Queensland Public Finance Standard 310(1) requires accountableofficers and statutory bodies to establish and integrate a programmanagement system with their resource allocation and accounting systems.

5.37 The focus of program management is to be on outputs and outcomes. Anoutput is a final good or service to the public, whereas an outcome is thedesired objective to which that output is directed. In other words, an outputis not produced for its own sake, but in order to achieve a desired outcomeor policy objective.

5.38 Public Finance Standard 310(2) requires a Program Management System toinclude a five year Strategic Plan which provides a focus for annualbudgetary and resource management strategies and decisions.

5.39 . The program management system is also to include a Resource ManagementSystem which focuses on outputs or outcomes achieved. Such a system is toinclude clear linkage to the Strategic Plan, group activities according toprograms for the purpose of management decisions and resource allocation,and include clearly stated, measurable objectives for each program.

5.40 Finally, a Program Management System is to include a PerformanceEvaluation and Review System (program evaluation) which is to determinewhether the policies, goals and program objectives remain appropriate andare being achieved and whether resources are optimally allocated acrossprograms and optimally utilised within each program.

5.41 Performance indicators are to be developed to help monitor performance.These indicators are to be relevant, verifiable, free from bias and, wherepossible, quantifiable. Programs are to be reviewed in terms of keyperformance indicators on an annual basis and at such other times as maybe appropriate.

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5.42 The Public Finance Standards (PFS) enable the Treasurer to requestcomprehensive evaluations of specific programs or functions, either by thedepartment or statutory body, or by the Treasury in conjunction with thatdepartment or statutory body. Each accountable officer and each statutorybody is to prepare a report for the Minister and, on request, the Treasurer,detailing the results of these reviews. Appropriate evaluation commentsare to be included in the department or statutory body's annual report (PFS1990, pp.40-41).

The Role of the Auditor-General in Prog-ram Evaluation

5.43 Program evaluation goes beyond efficiency. In particular there is thequestion of the appropriateness of programs. In other words, the question ofwhether the objectives to which particular programs are directed arecompatible with the priorities and philosophies of the government of the day.

5.44 Appropriateness is an expressly value-oriented concept. This means thateven if all existing programs were 100% efficient in terms of the objectiveswhich had been set, the need for evaluation in terms of appropriatenesswould still exist. The Coombs Commission considered that it was possiblefor the Auditor-General to examine whether programs were achieving theirobjectives without being called upon to pass judgment upon theappropriateness of the programs themselves (Coombs Report 1976, p.49).In other words, they did not include in efficiency auditing the task ofprogram evaluation.

5.45 Continuing this theme, Report 296 considered that an important issue waswhether the Auditor-General has the legislative authority to evaluate themerits of policies adopted by departments. Two factors were identified:

(a) the need for efficiency audits to describe and explain public sectorinefficiencies. An efficiency audit contributes if it identifiesinefficiencies and it is even more valuable if it explains the reasonswhy these occurred; and

(b) the distinction between commenting on a government's policies inparticular programs and commenting on the effects of a government'spolicies on the agency itself. The former commentary is notappropriate but the latter could be acceptable.

5.46 In the United Kingdom, the Comptroller and Auditor-General has beengiven a mandate to conduct audits into the 'economy, efficiency andeffectiveness' with which agencies use their resources. At the same time,the National Audit Act prevents the Comptroller and Auditor-General fromquestioning the merits of government policy (Report 296, pp.156-157).

5.47 In summary, it is suggested that any efficiency audit function for theAuditor-General should not extend to examination of the appropriateness ofprogram objectives and specific government policies which have an impacton program efficiency. However, it could be a valid role for theAuditor-General to examine the extent to which predetermined programobjectives are being met and to report on the quality of program evaluation,incorporating appropriateness considerations, undertaken by agenciesthemselves.

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Reporting- on Performance Indicators

5.48 The September 1989 Review of the Treasurer's Statement by the VictorianAuditor-General observed that the effectiveness of program budgeting inVictoria had been hindered by the absence of specific responsibilities fordepartments to report to the Parliament and the Government on programperformance (VIC Economic and Budget Review Committee 1990, pp.70-77).

5.49 Noting the difficulties of achieving compulsory evaluation and externalreporting of program effectiveness in New South Wales, the VictorianEconomic and Budget Review Committee concluded that attempts by thePublic Service Board to implement performance reporting were like "a callfor turkeys to volunteer for Christmas dinner" (1990, p.81).

5.50 Perhaps because of these difficulties, critics of program management havenoted that few published plans or program budgets actually specify theindicators, output or otherwise, to be used in the evaluation of publicorganisations and their programs (Considine 1990, p.175). TheCommonwealth Employment Program Audit in 1987 demonstrated thedangers of program managers being responsible for determining ways ofassessing the success or failure of their programs. It has been argued that,as evaluations may eventually show some program in a poor light, there isevery re~son to expect some interference by managers of the evaluationprocess (Weiss 1973, p.51).

5.51 In order to encourage the development and reporting of appropriateindicators the Victorian Economic and Budget Review Committeeconsidered that it was necessary to place as much external pressure aspossible on agencies and governments. That Committee considered threepotentially useful mechanisms were:

(a) Parliamentary committee review;

(b) Auditor-General review; and

(c) the stipulation of performance indicators in legislation or regulation.

5.52 Although that Committee recommended that a Parliamentary Committeeshould scrutinise the development of performance indicators in selectedagencies, it suggested that two options were worthy of consideration. First,that the Auditor-General review the process and systems by which agenciesdevelop performance indicators. Second, that the Auditor-General reviewthe appropriateness and adequacy of actual agency performance indicators(VIC Economic and Budget Committee 1990, pp.63-64).

Comment is sought on the following issues:

(a) should the Auditor-General conduct efficiency audits;

(b) should the Auditor-General have authority to conduct efficiency auditsinto statutory authorities and government enterprises as well asdepartments;

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(c) should the Auditor-General be required to undertake efficiency auditsof all major government activities over a defined period.;

(d) if the Auditor-General should have an efficiency audit function, whataspects of this function should be prescribed in legislation;

(e) what role, if any, should the Auditor-General play in program .evaluation; and

(f) what role should the Auditor-General play in monitoring and reportingon the quality of performance indicators produced by auditees?

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CHAPI'ER SIX

REPORTING OBUGATIONS OF THE AUDITOR-GENERAL

Reporting to Parliament

6.1 An essential element in the Auditor-General's accountability function is therequirement for the Auditor-General to report to Parliament on the outcomeof audits conducted by his or her office.

6.2 It is generally accepted practice that Auditors-General should besubstantially free to choose the matters that should be reported toParliament. This principle is seen as vital to the independence of theAuditor-General and the concomitant ability to determine matters thatshould, in the interests of accountability, be brought to Parliament'sattention.

6.3 There is also a practical reason for this principle. Most Parliaments rely onthe Auditor-General to act as a filter, allowing issues of importance to bereferred to the legislature, but excluding matters of minor or routinesignificance.

6.4 Nevertheless, variations occur between jurisdictions in thecomprehensiveness and frequency of reporting by Auditors-General.Factors which appear to determine the amount of reporting includestatutory requirements, interest in the issue by Parliamentary committees,and the philosophy of individual Auditors-General.

STATE PRACTICE

6.5

6.6

6.7

Generally, State Auditors-General produce an annual report to Parliamentwhich summarises audit activities conducted during the year and principalissues and recommendations. As a general rule, individual audit reportsare not tabled in Parliament although, in some States, special reports andefficiency reports are tabled.

In Queensland, the Financial Administration and Audit Act requires theAuditor-General to report annually to Parliament on the audits of thepublic accounts, the departmental accounts and the accounts of localauthorities, statutory bodies and associated bodies. In these annualreports, the Auditor-General is required to advise whether the relevantaudits have been completed and appropriate certificates given, and toprovide comments on matters which, in the judgement of theAuditor-General, are significant.

Since 1987 these reporting obligations have been observed through thepresentation of two reports to Parliament each year:

(a) a principal report tabled during the Spring session which reports onaudits of the public accounts departmental accounts, statutory bodiesand local authol-ities; and

(b) a supplementary report in the Autumn session which reports on thecompletion of audits (particularly non-metropolitan) incomplete at thetime of the principal Report.

34

6.8 There is also provision in the Financial Administration and Audit Act forthe Auditor-General to table special reports on matters arising out of auditsundertaken.

6.9 At the time of the Fitzgerald Inquiry, the reporting procedures of theAuditor-General were subject to criticism in Parliament and, subsequently,in the Fitzgerald Report. The Fitzgerald Report observed that:

"It would appear that when the Auditor-General encountered any accountingproblem, Parliament was not advised but instead the department or instrumentalityconcerned. Where necessary, the type of corrective action required was specified, andthe department or instrumentality was able to correct it.

Insofar as reporting the matter was concerned, it has been largely left to departmentsand instrumentalities to report to Parliament on their activities and financial affairsas they have seen fit.

The Auditor-Generafs reports to Parliament, other than in exceptionalcircumstances, have been basically formal and contained little by way of criticalcomment" (p.135).

6.10 The present and previous Auditors-General have responded to thesecriticisms, noting that:

(a)

(b)

(c)

new reporting procedures since 1985 require the Treasurer's annualstatement, the departmental accounts and explanatory statements tobe furnished to Parliament by the Treasurer and not, as previously, bythe Auditor·General. These procedures are in line with changedreporting procedures in some other jurisdictions. However, aconsequence has been to reduce significantly the size of theAuditor·General's annual report to Parliament;

the audit approach adopted by the Department of the Auditor-General,consistent with general professional trends, has been to aim atprevention of problems rather than post·event detection. This hasinvolved reporting audit findings to senior management and Ministersin accordance with the Financial Administration and Audit Act andmonitoring agency compliance with audit recommendations. In lightof this approach, reporting to Parliament has been regarded asnecessary only where responses to audit findings have beenunacceptable; and

the Auditor·General's reports to Parliament reflect the principlecontained in the Financial Administration and Audit Act and acceptedin . other jurisdictions that only matters of significance should bereported to Parliament (QLD Auditor-General 1988, pp.4-5; Thomas1989).

6.11 While these observations are important, examination of the annual reportsproduced by the Queensland Auditor-General indicate that significantly lesscomment is produced on audit findings and recommendations thancontained in comparable reports in some other States and Territories.

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6.12 For example, the Victorian Auditor-General's 1989 annual report onministerial portfolios contains a detailed summary of significant auditfindings for each ministerial portfolio together with major recommendationsmade by the auditor to management. The report also includes comments bymanagement on audit findings.

6.13 A somewhat different approach is taken by the Auditor-General of theNorthern Territory whose annual report focusses on general financialadministration problems identified in the course of audits rather thanmatters specific to individual agencies. Included are explicitrecommendations to the Parliament and the Government intended toimprove financial reporting and administrative efficiency.

6.14 Discussions have been held between the Queensland Public AccountsCommittee and the Queensland Auditor-General with regard to the timingand content of the Auditor-General's reports to Parliament. It isunderstood that the Auditor-General intends to incorporate morecommentary on significant audit issues in future reports.

COMMONWEALTH REPORTING

6.15 The Commonwealth Auditor-General places strong emphasis on reportingsignificant audit findings to the Parliament. In addition to the annualreport on the Audit Office, the Commonwealth Auditor-General tables:

(a) an annual report on the aggregate financial statement of the Ministerfor Finance;

(b) an annual report on departmental financial statements;

(c) an annual report on ministerial portfolios;

(d) two summary reports per year which summarise the results of allregularity audits, special audits, project audits and efficiency auditsconducted by the ANAO in the preceding six months;

(e) separate reports of regularity and project audits determined by theAuditor-General to be of potential significance to the Government,Parliament, public service, the media and the general public;

(f) separate reports of efficiency audits (see para 6.17); and

(g) special reports on investigations into alleged or apparent agencymismanagement.

6.16 While some of these reports are specifically required by the CommonwealthAudit Act to be tabled in Parliament, a major impetus for the overall level ofreporting appears to be the current Auditor-General's own perception of hisrelationship with Parliament, and the Auditor-General's responsiveness tosuggestions made by Parliamentary committees for more frequent reportson significant audit findings.

36

Comment is invited on whether:

(a)

(b)

(c)

(d)

(e)

all audits conducted by the Queensland Auditor-General should besmmnarised in an annual report or in more frequent reports to

.Parliament;

more substantial snrnmaries of significant audit findings should beincluded in these reports;

the Auditor-General should be required to report circumstances whererecomm.endations arising out of audit findings have been implementedby management;

the Auditor-General should be required to report all specialinvestigations undertaken at the request of the Ministers and theParliam.ent; and

separate reports on audits of significance should be tabled by theAuditor-General

EFFICIENCY AUDIT REPORTING

6.17 The Commonwealth Auditor-General is required by the CommonwealthAudit Act (s.48F) to produce a report on each efficiency audit. TheAuditor-General may include the report in the annual report to Parliamenton the financial statements, or it may be tabled separately (s.48F(8)Commonwealth Audit Act), In practice, efficiency audit reports are tabledin separate volumes as they are completed.

6.18 Prior to the release of an efficiency audit report, the Auditor-General hasadopted the practice of issuing a press release drawing the media'sattention to the report and the principal findings.

6.19 The Commonwealth Auditor-General is also required to prepare an annualreport on efficiency audits which indicates the costs of the audits and thebenefits obtained (s.48G Commonwealth Audit Act). This report is includedin the ANAO's annual report.

6.20 The facility for the Commonwealth Auditor-General to table efficiencyreports separately is not available to a number of other Auditors-General,including the Canadian Auditor General. The Canadian Auditor Generalreports on efficiency audits through the annual report. In 1989, thisamounted to 28 chapters (To assist Members of Parliament digest thereport, the Canadian Auditor General produces a video which highlightskey findings in each chapter).

6.21 In South Australia, reports on efficiency audits must be submitted to theTreasurer and the responsible Minister. The Speaker of the House ofAssembly and the President of the Legislative Council must be informed ofthe recommendations - either by way of the Auditor-General's annual reportor by a separate report - but are not required to be given a copy of the report(s.37 (1) SA Public Finance and Audit Act).

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6.22 Generally, the approach adopted in South Australia is to produce fairlyshort reports for internal circulation to the auditee and the government,and to summarise principal findings in the annual report to Parliament(Glynn 1987, p.13).

To what extent should the Auditor-General report to Parliament onefficiency audits that have been conducted in the event that theAuditor-General is given an efficiency audit function?

SECRECY RESTRICTIONS ON REPORTING

6.23 Sedion 69 of the Queensland Financial Administration and Audit Actrequires the Queensland Auditor-General and every authorised auditor to:

Wpreserve and aid in preserving secrecy with respect to all matters and things thatcome to their knowledge in the exercise or performance of their powers, authorities,functions or duties under this Act or any other Act or law and shall notcommunicate, save in such exercise or performance, to any person any such matter orthing. "

This provision was not contained in earlier audit legislation.

6.24 The pr.esent Queensland Auditor-General has commented:

wPrior to the 1977 enactment, Auditors-General always insisted on the preservationof confidentiality as a matter of audit practice in keeping with the requirements ofthe auditing standards and practices promulgated by the professional accountingbodies.

It is necessary to consider whether the existing quite constrictive secrecy provisions ofthe Act needlessly hamper an Auditor-General in exercising due professionaldiscretion in relation to a matter or thing of which he has some knowledge andwhich would be of some benefit to a body such as a Parliamentary Committee" .(Nolan 1990, correspondence).

6.25 In his 1988 Annual Report, the previous Auditor-General, Mr Doyle,suggested that the secrecy provision excluded the Auditor-General and anystaff from being called as witnesses under the Public Accounts CommitteeAct 1988. However, Mr Doyle considered that this was appropriate:

W[The Auditor-General and authorised auditors} cannot be called upon to provideinformation required by the Public Accounts Committee in regard to the activities ofa third party. This, quite correctly in my view, acknowledges the right of agenciesunder examination to present their own evidence to the Committee with confidencethat the merits of their case rather than audit viewpoints will have the principleinfluence on the Committee's deliberation However, I do not see it prohibitingexplanation or clarification by the Auditor-General or his officers of matters raisedin the Auditor-General's reports to Parliament" (QLD Auditor-General 1988,p.18).

6.26 The Discussion Paper issued by the Auditor-General of Western Australiasupports the position of Mr Doyle in respect of similar provisions in theWestern Australian Financial Administration and Audit Act. The Paperobserves:

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"Whilst the Auditor-General plays a key role in evaluating accountability in theWestminster system of parliamentary democracy, access by the Parliament and itscommittees to the primary information source is through the responsible Ministerand then accountable entity. Recognition that management is responsible fordisclosure and management has the prerogative to disclose simplifies the conceptthat the information subject to audit is the property of the audited entity and not theauditor" (WA Policy Advisory Committee 1990, p.20).

6.27 Australian Accounting Standards also state:

"Auditors shall respect the confidentiality of information acquired in the course oftheir work and shall not disclose any such information to a third party withoutspecific authority or unless there is a legal or professional duty to disclose" (WAPolicy Advisory Committee 1990, p.20).

6.28 Nevertheless, it may be asked whether the disclosure responsibilities of thepublic sector auditor go beyond that envisaged by general accountingstandards, particularly when the Parliament is viewed as the ultimateclient of the auditor.

Restrictions on Efficiency Reporting

6.29 At Commonwealth level, certain restrictions do apply to efficiency auditreporting by the Auditor-General. An auditee may request theAttorney-General to issue a certificate prohibiting disclosure of informationobtained in the course of an efficiency audit, but only on specified grounds.These include where the disclosure might prejudice national security,Cabinet confidentiality, Commonwealth/State relations or the commercialinterests of a public authority (s.48F(5) Commonwealth Audit Act). Wherea certificate is issued, the Auditor-General may include the certifiedinformation in a restricted report. This report may be forwarded only to thePrime Minister, the Minister for Finance and the Minister responsible forthe auditee, although a non-confidential version is required to be tabled inParliament (s.48F(6) and (7) Commonwealth Audit Act).

6.30 In practice, Section 48F(5) has rarely been used. The first occasion was in1987 in connection with an efficiency audit into RAAF Explosive Ordinance(ANAO 1988, p.33).

6.31 Report 296 considered that the provision should be retained to allow theAuditor-General to provide confidential reports on efficiency audits ofgovernment enterprises where public reporting might prejudice thecommercial interests of the enterprise. However, in such circumstances, acopy of the report should be provided to the Public Accounts Committee aswell as to the responsible Minister (Report 296, p.177).

Comment is invited on whether the Auditor-General should be required toobserve confidentiality in respect of matters arising out of an audit. Inparticular:

(a) in what circumstances could this 00 appropriate?

(b) should this be a matteJ' for legiBlation?

39

PARLIAMENTARY SCRUTINY OF AUDITOR-GENERAL'S REPORTS

6.32 In many Westminster jurisdictions, parliaments have been making greateruse of reports of Auditors-General as a means of obtaining closer scrutiny ofexecutive action. Traditionally, Parliamentary scrutiny in the audit areahas centred on legal compliance issues. More recently,' the growth ofprogram management and efficiency auditing has encouraged legislaturesto give more attention to performance aspects.

6.33 In Australia, the most striking developments in Parliamentary review ofaudit report have occurred in the Commonwealth Parliament. A large userof Auditor-General's reports has been the Joint Committee of PublicAccounts which, since 1951, has been required by its statute to examine all,reports of the Auditor-General (Report 296, p.18). Each year, theCommittee conducts several major investigations into issues raised in theAuditor-General's reports or referred to the Committee.

6.34 In recent years, the Auditor-General's reports have also been used bySenate Estimates Committees whose function is to give detailedexamination, on behalf of the Senate, to the government's proposed annualbudget. This information has been taken into account by the Committees inmaking their recommendations to the Senate.

6.35 The Queensland Parliament does not yet have estimates committees orstanding committees on particular portfolios or government functions. Theestimates are debated by the Legislative Assembly sitting as a committee ofthe whole.

6.36 In Queensland, a limitation on Parliament's capacity to review reports ofthe Auditor-General has been the absence, until recently, of Parliamentarycommittees charged with this responsibility.

6.37 In 1988 the Ahern Government established a Public Accounts Committee byAct of Parliament. The Committee has responsibility to review annualfinancial statements and other financial reports and documents, and alsoreports of the Auditor-General. It may also examine and inquire into anymatter relevant to a financial statement or other financial report which, inthe Committee's opinion, has or could have:

"adverse implications in respect of the ,.. probity, economy, efficiency andeffectiveness of the collection and expenditure of moneys and the management andcontrol of assets and liabilities" (s.13 (1), Public Accounts Committee Act),

6.38 The ability of this Committee to discharge its functions in relation to theAuditor-General's reports depends on the coverage and comprehensivenessof those reports.

Relationship Between the Auditor-General and Parliamentary Committees

6.39 In jurisdictions which possess Public Accounts Committees, and otherParliamentary committees concerned with review of governme:q.texpenditure and program management, close working relationships oftendevelop between the committees and the Auditor-General's office.

40

6.40 This is particularly the case with Public Accounts Committees which areusually required by their legislation to review reports of theAuditor-General. Often such committees rely significantly on assistancefrom the Auditor-General's office. This may include:

(a) meetings between the Auditor-General and committee members toprovide background information on audit findings and issues ofmutual interest;

(b) briefing of secretariat staff on specific audit report findings;

(c) secondment of audit staff to assist committee enquiries; and

(d) formal appearance of the Auditor-General and audit staff as witnesseswhere considered appropriate.

6.41 In Queensland, good working relationships appear to have been establishedbetween the Auditor-General's office and the Public Accounts Committee.This relationship extends to periodic meetings with the Auditor-Generaland occasional secondment of audit staff to assist in committee enquiries.

6.42 It is understood that the secrecy provisions of the Financial Administrationand Audit Act have posed some difficulties for both parties in consideringtheir respective relationships and have prevented appearance by theAuditor-General and any staff as formal witnesses at Committee hearings(see para 6.23).

6.43 The Chairman of the Public Accounts Committee has suggested that therelationship between the Committee and the Auditor-General shouldremain essentially informal (Hayward 1990, p.6).

Comment is sought on the appropriate relationship that should applybetween the Auditor-General and Parliamentary committees, including thePublic Accounts Committee, in the conduct of Parliamentary reviews ofaudit reports and related matters.

Reporting to the Executive

6.44 In most jurisdictions, Auditors-General report significant audit findings toauditees, including matters which require rectification or improvement.

6.45 In Queensland, the Auditor-General is required by the FinancialAdministration and Audit Act to report to the Treasurer, the accountableofficer and the statutory body in connection with recommendations arisingrespectively from audits of the public accounts, departmental accounts andthe accounts of statutory bodies where such recommendations requireattention or further consideration. Matters of major significance must alsobe reported to the responsible Minister and the Treasurer (s.70(4) and (5».

6.46 There is a valid reason for the Auditor-General to report audit findings tothe Executive as well as to Parliament. As suggested in para 6.53, it isagency management which bears ultimate responsibility for ensuring thataudit recommendations are considered and appropriately implemented.

41

6.47 However, the responsibility of the auditor to management should not inhibitthe Auditor-General from reporting to Parliament on overall progress ofaudits and specific matters which should be brought to Parliament's noticein the interests of accountability.

6.48 In this. context, attention is drawn to Section 75A of the FinancialAdministration and Audit Act which requires the Auditor-General to informthe Treasurer or appropriate Minister in all cases where he or she intendsto include a matter of major significance in a proposed report toParliament. The Auditor-General is required to include in the report anycomments received from the Minister.

6.49 Similar requirements exist in Commonwealth, New South Wales andVictorian audit legislation in relation to efficiency audit reports.

6.50 The key issue is whether statutory requirements for Auditors-General torefer proposed Parliamentary reports to auditees unnecessarily restrict theauditor's independence. On the one hand, fairness might suggest that chiefexecutives, if not Ministers, should be informed of proposed comments andthat opportunity be provided for them to have their point of view included inthe report. On the other hand, opportunity could be provided for auditees torespond to the Auditor-General's findings through a separate process,perhaps in response to follow-up by the Public Accounts Committee.

6.51 What is important is that an Auditor-General should be free from anypressure to alter proposed findings as a consequence of prior circulation of aproposed report to Parliament.

Comment is invited on whether the Auditor-General should be required toobtain auditee comments on a proposed audit report to Parliament. If so,how should such a procedure operate?

Follow-Up ofAuditor-General's Reports

6.52 It may be suggested that both the Executive and the Parliament haveresponsibilities to ensure that attention is given by auditees to auditrecommendations and that adequate procedures are in place to monitortheir implementation.

6.53 Primary responsibility for implementing audit recoIllillendations rests withthe auditee.

6.54 Auditees have a responsibility to ensure that recommendations relating tonon-compliance with financial regulations and auditing standards arepromptly implemented. They must also ensure that recoIllillendationsrelating to the improvement of program efficiency are properly consideredand, except where there are justified reasons for not doing so, appropriatelyimplemented.

6.55 The Parliament too has a potentially significant role. Where Parliamentplays an active role in reviewing audit reports, a logical corollary of this roleis for Parliament to also monitor compliance by government agencies withkey recommendations contained in the reports.

6.56 Finally, it might be suggested that Auditors-General themselves have aduty to the Parliament to monitor the outcome of audit findings.

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6.57 Report 296 concluded that several improvements were necessary to ensuremore effective monitoring of audit implementation by the CommonwealthGovernment and the Parliament. These included:

(a) where an auditee accepts the proposals for change made by theAuditor-General, the auditee should provide the relevantParliamentary Committee with a timetable for implementation;

(b) quarterly reports of Ministers to the Minister for Finance on actiontaken by agencies within their portfolio to implement auditrecommendations should be made available to the Public AccountsCommittee and published;

(c) annual reports of statutory authorities as well as departments shouldinclude information on agency responses to audit recommendations;and

(d) the Auditor-General should:

(i)

(ii)

devote more substantial resources to follow-up of performanceaudits; and

brief Ministers and the Prime Minister on significant findings(Report 296, pp.188-200).

6.58 In Queensland, the Auditor-General monitors implementation of auditreports through correspondence with chief executives. However, thereappears to be no systematic reporting to Parliament of auditimplementation, either by the Auditor-General or by chief executives.

Comment is invited on the respective responsibilities of auditees, Ministers,central agencies, Parliamentary committees and the Auditor-General formonitoring and reporting to Parliament on responses to audit findings.

Should departments, statutory bodies and local authorities be required toreport on implementation of audit recommendations in their annual reports?

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CHAPI'ER SEVEN

APPOINTMENT AND TENURE OF THE AUDITOR-GENERAL

7.1 In Australia, Auditors-General were established to assist in maintainingthe accountability of the administration to Parliament. Audit Acts provide·that the Auditor-General is the external auditor for government agenciesand require the Auditor to report to Parliament on audits.

7.2 As previously noted, potential tension exists between the Auditor-General'sresponsibilities to Parliament on the one hand, and any responsibilities toauditees and Ministers on the other. In certain circumstances,Auditors-General are required to report to both Parliament and theExecutive on audit findings. As well, they are required to be responsive tofinancial management and accounting standards established by theExecutive while, at the same time, exercising authority to audit accounts ina manner which they consider is appropriate.

7.3 Report 296 into the Commonwealth Auditor-General considered that, overtime, confusion had arisen within government agencies about where theAuditor-General's responsibility ultimately lay.

7.4 The Report recommended that audit legislation should state unequivocallythat the Auditor-General is an officer of the Parliament in order toemphasise the Auditor-General's primary relationship to the Parliament(Report 296, p.76).

7.5 Report 296 also pointed to a certain ambiguity in the appointmentprocedures for the Auditor-General.

7.6 In Australian jurisdictions, special protections exist to prevent arbitrarydismissal of an Auditor-General by the Executive. Legislation usuallyprovides that the Auditor-General shall hold appointment until the age of65. Further, the Auditor-General cannot be dismissed from office exceptwhere the Parliament makes an address to the Governor or Governor-inCouncil seeking a dismissal. Grounds for dismissal are prescribed in theaudit legislation.

7.7 However, while Parliaments have been given the authority to determinewhether an Auditor-General should be dismissed in accordance with thelaw, Parliaments have played no role in the appointment of theAuditor-General. Appointments are generally made by theGovernor-in-Council on the recommendation of a government Minister. InQueensland, the responsible Minister is the Premier.

7.8 Report 296 considered that the Auditor-General's fundamental relationshipwith Parliament and the need to ensure independence from the Executive,required that Parliament should have greater involvement in theappointment of the Auditor-General. It recommended that nominations tofill future vacancies should be forwarded to the Governor-General by thePrime Minister after consultation with a Parliamentary advisory panel.This panel should comprise the Chairperson of the proposed ParliamentaryAudit Committee (see para 8.13), the Minister for Finance and anOpposition representative (Report 296, p.77).

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7.9 The New South Wales Public Accounts Committee in its report alsosupported the principle of Parliamentary involvement in the appointment ofan Auditor-General but considered that:

"For Parliament to play its proper role requires more than to simply provide forinput into the Executive's decision or allow for 'consultation'. The Committeeconsiders that Parliament and not the Executive should make the recommendation tothe Governor for the appointment of the Auditor-General. This is the practice inOntario whereby a parliamentary committee recommends the appointment and thenthe matter is open to address in the House" (Report 49, p.21).

7.10 New Zealand has already moved to adopt this practice with respect to theappointment of the New Zealand Controller and Auditor-General (Report49, p.21).

7.11 The New South Wales Government has yet to respond to the position of theNew South Wales Public Accounts Committee. The Hawke Governmenthas accepted the recommendation of the Commonwealth JCPA for anadvisory input from Parliament into the appointment of theAuditor-General, although the final decision will remain with the PrimeMinister (ANAO 1989a, p.8).

7.12 However, the Government has not accepted the recommendation forlegislation to be changed to state unequivocally that the Auditor-General isan officer of the Parliament. In stating its case, the Government arguedthat the Auditor-General should remain formally independent of both theExecutive and the Parliament and that existing arrangements atCommonwealth level have effectively preserved the required independenceof the Auditor-General (ANAO 1989a, p.3).

7.13 The principle that the Auditor-General should be independent of both theParliament and the Executive arises from concern that the Auditor-Generalshould be free from political interference of any kind in the course ofconducting audits and reporting audit findings.

7.14 This includes potential interference from the Speaker, ParliamentaryCommittee chairpersons and backbenchers as well as Ministers.

7.15 However, whether the Auditor-General's independence would be reduced bymaking the position a Parliamentary one would in lart depend upon thenature of any controls exercised by the Speaker an other Parliamentaryofficers over the Auditor-General.

7.16 It appears that the Commonwealth JCPA did not envisage any change inthe independence required of the Auditor-General in carrying out his or heraudits, but rather wished to reinforce the independence of the Audit Officefrom the Executive. The JCPA did, however, recommend that Parliamentshould have greater control over the budget process and, in the course ofthat process, be able to make suggestions for audit topics (see para 8.13).

Comment is invited on the merits of giving the Queensland Parliamentgreater involvement in the selection process for the position ofAuditor-General To what extent should Parliament be involved and howmiiht the process be arranged?

45

Tenure

7.17 In respect of tenure, Report 296 suggested that a balance needs to be struckbetween security of tenure for the Auditor-General, and the need forperiodic injection of fresh talent and leadership skills into the position. Itadvocated that appointments to the position of CommonwealthAuditor-General be for ten years or until the incumbent reaches the age ofsixty-five years, whichever is the sooner (Report 296, pp.78-79).

7.18 The New South Wales Public Accounts Committee has recommended thatappointments to the position of New South Wales Auditor-General be forseven years.

7.19 The Committee also considered that appointment should be non-renewable:

"because provision for re-appointment has the potential to compromise rigor andindependence, particularly in the latter stages of an initial term. In addition, forsimilar reasons, the appointee should not be eligible to take up other positions withinthe New South Wales public sector" (Report 49, p.25).

Comment is sought on the adequacy of tenure provisions for the QueenslandAuditor-General

46

CHAPrER EIGHT

RESOURCING THE AUDITOR-GENERAL'S OFFICE

Resource Levels

8.1 The capacity of an external audit office to undertake its duties effectivelycan be substantially influenced by the level and quality of resources ­financial, human and physical - available to it.

8.2 The Fitzgerald Report considered that the Queensland Auditor-Generalshould be given resources to the extent necessary to enable theAuditor-General to undertake an effective audit role (Fitzgerald Reportp.135).

8.3 A key issue, therefore, is the adequacy of resources available to theQueensland Auditor-General to fulfil present audit functions and any newfunctions resulting from this review.

8.4 The following table shows the annual appropriation, expenditure andstaffing level of the Department of the Auditor-General since 1985/86:

85/86 86/87 87/88 88/89 89/90

Appropriation ($m)* 5.241 5.835 6.012 6.387 6.724

Expenditure ($m) 5.412 5.777 6.070 6.644 6.772

Receipts ($m) 2.204 2.673 3.176 3.333 3.999

Staff Estab- 153 153 153 153 153Jisbment

.Actual StaffLevel 150 151 148 148 148

* Includes Salary of the Audi tor-General

90/91(Est)

8.295

3.792

153

147

8.5 Advice- from the Department of the Auditor-General is that the budgetincrease of 1990/91 stems from salary award increases and new accountingarrangements whereby departments and not Treasury are debited forsuperannuation contributions.

8.6 It is understood that no increase in staff establishment has occurred since1984 when one extra position was approved. However, in 1985, theresponsibilities of the Department increased with the extension of theAuditor-General's mandate over statutory bodies. In practical terms, theDepartment of the Auditor-General was required to audit an additionalthree hundred sets of financial statements, mostly in country areas.

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8.7 The Department has advised that limitations on staffing have requiredproductivity improvements, particularly through the adoption of cyclicalapproaches where materiality and risk have been considered to permit this.The Department has also commented that:

"staff have more than pulled their weight by working unpaid and unrecognisedovertime as well as foregoing variable working hour 'credits'" (Rollason 1990b,correspondence) .

8.8 The issue of resources will be addressed by the Commission following thereview of the Auditor-General's functions and operating procedures, sincethe recommendations emanating from this review may have an impact onthe resource requirements of the Department.

Resource Allocation Process

8.9 In· Australian jurisdictions, the annual budget allocation for theAuditor-General's office is determined by the Executive. In this respect, theAuditor-General's office is treated in much the same way as a governmentdepartment which has to justify its proposed expenditures to the Cabinet.

8.10 In Canada and the United Kingdom, Parliament plays a much greater rolein determining the annual budget of the national audit office, consistentwith the particular interpretation placed in those countries upon theindependence of the Auditor-General and his or her relationship with theParliament.

8.11 In Canada, the Auditor General proposes the annual budget for their office.The Auditor General's proposals are tabled in Parliament by the Ministerfor Finance but this is merely a formality as the Minister's Department hasno role in assessing the budget prior to its tabling. Once the budget istabled, Parliament votes on the legislation with the Public AccountsCommittee taking a principal part in the debate. The Executive does notnormally oppose the legislation.

8.12 Report 296 examined the budget process for the CommonwealthAuditor-General and suggested that budgetary controls established by theExecutive had limited the capacity of the ANAO to undertake a meaningfulprogram of efficiency audits and to recruit and retain appropriate staff.

8.13 The Report recommended that Parliament be given a greater role in thebudget process through:

(a) establishment of an Audit Committee of Parliament which would havethe major responsibility for advising on the annual budget allocation.The Committee would include the Chairman of the Public AccountsCommittee and the Minister for Finance (Report 296, pp.71-72);

(b) inclusion of the ANAO's annual budget appropriation in theAppropriation (Parliamentary Departments) Bill. In effect, the ANAObudget would form part of the budget for the Commonwealthparliamentary service; and

(c) giving the Audit Committee of Parliament the right to suggestefficiency audit topics to the Auditor-General; however, theAuditor-General would continue to exercise independent discretion inchoosing topics.

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8.14 In its response, the Hawke Government rejected the Committee'srecommendation that the ANAO's budget be included in the ParliamentaryDepartments Bill suggesting that in the Australian system of government,every publicly funded agency, including the ANAO and the Parliament,must have its appropriations set by the government (Ministerial Statement).

8.15 Commenting on the proposal for an Audit Committee, the Governmentconsidered that:

"The establishment of such a Committee is a matter for the Parliament todetermine. While the Government would be prepared to consider any comments thatthe Committee might make it would reserve for itself the right to accept or reject suchcomments. It would not be appropriate for the Minister for Finance, as a member ofthe Executive to be a member of the Committee" (ANAO 1989a, p.2).

8.16 The New South Wales Public Accounts Committee also considered theJCPA's recommendation in terms of its applicability to New South Walesbut concluded that resource independence for the Auditor-General wouldnot be served by giving the budgetary review role to a Parliamentarycommittee. Instead, it considered that the budget process should besubstantially free from both Executive and Parliamentary committeecontrol. This could be achieved by:

(a) C9D,tinuing present New South Wales practice of having all regulatoryaudit work funded by audit fees, the level of which should bedetermined largely by the Auditor-General; and

(b) over time, providing automatic linkage of funding for efficiency auditswith changes in government outlays (Report 49, Ch.7).

QUEENSLAND ARRANGEMENTS

8.17 In Queensland, the budget for the Department of the Auditor-General isestablished by the Government in the same manner as for other publicservice departments. The Department's budget is included in the AnnualAppropriation Bill. While the Chairman of the Public Accounts Committeehas taken part in the debate on the Auditor-General's estimates, the PublicAccounts Committee has no formal role in the process.

Comment is invited on the appropriateness of current resource allocationprocedures for the Department of the Auditor-General. What is theapplicability to Queensland of:

(a) resonree allocation procedures proposed by the Commonwealth andNew South Wales Public Accounts Committees for the Commonwealthand New South Wales Auditors-General; and

(b) overseas procedures?

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AnditFees

8.18 In certain jurisdictions, government bodies which derive revenue fromnon-Budget sources are levied fees by the Auditor-General for theperformance of regularity audits. Government departments and statutoryauthorities whose operating expenses are substantially derived fromconsolidated revenue are normally exempted from the fee requirement.

8.19 In Queensland, the Financial Administration and Audit Act provides thatthe Auditor-General may charge fees, based on rates approved by theTreasurer, for any audit other than one which would be a charge on theConsolidated Revenue or the Loan Fund. In the 1988/89 financial year,approximately half of the Auditor-General's expenditure was recovered fromaudit fees (QLD Auditor-General 1990a, p.23).

8.20 One jurisdiction where audit fees are not levied is Canada, which is oftenreferred to as a leader in public sector financial management. In Canada,government enterprises are not charged an audit fee because of a belief thatregularity audits are performed on behalf of the Parliament and that tocharge a fee could compromise this principle.

8.21 Report 296 examined the Commonwealth practice of charging fees. Asmentioned in para 7.3, the Report considered that, over time, confusion hadarisen among Commonwealth agencies about who the Auditor-General wasresponsible to, with some auditees believing that responsibility was to theauditee. According to the Report, one of the contributing factors was thepractice of charging audit fees (Report 296, p.64). The Report also observedthat:

"Commercially-oriented government organisations which pay audit fees to theAuditor-General are anxious to reduce audit costs as much as possible. Hence, it isalmost inevitable that they compare their audit fees with those of their competitorsand, if the latters' audit fees are less than theirs, seek to have the Auditor-Generalremoved as their external auditor" (Report 296, p.64).

8.22 The Report concluded that Parliament, not auditees, should pay for allaudits conducted by the Auditor-General consistent with the principle thataudits are conducted by the Auditor-General on behalf of the Parliament(Report 296, pp.64-65). However, it recommended that the Auditor-Generalshould identify the full costs of each audit in each annual report as a meansof ensuring accountability for resources expended by the ANAO.

8.23 The Hawke Government rejected the recommendation that Parliamentshould pay audit fees, contending that:

"the existing audit fee arrangement provides a useful discipline on both the auditee,to ensure that internal systems are adequate so as to minimise the costs of audit, andon the [ANAOJ to adequately control audit resources and be accountable for the feecharged, which the transparency of a fee system can best provide. Existing feearrangements will be continued and consideration will be given to extending it to theaudit of the financial statements of all statutory authorities and departments in duecourse" (ANAO 1989a, p.4).

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8.24 Citing similar reasons, the New South Wales Public Accounts Committeealso rejected the arguments of the JCPA. The Committee recommendedcontinuation of present arrangements in New South Wales whereby allauditees pay audit fees (Report 49, p.13).

8.25 The Auditor-General of Western Australia has also recommended that a_ user pays approach to audit charging apply to government agencies in

. Western Australia (WA Auditor-General 1989).

Comment is invited on:

(a) whether audit fees should be charged for audits conducted by theQueensland Auditor-General;

(b) what types of government agencies should be charged audit fees; and

(c) who should determine the level of audit fees to be charged.

Hnman Resource Management Issues

SKILL REQUIREMENTS

8.26 The modern audit environment requires that an audit office effectively keepabreast of changing audit approaches and technologies.

8.27 An issue to be explored in this review is whether the skills of theDepartment of the Auditor-General are adequate for its presentresponsibilities and any new responsibilities which could be recommendedby the Commission.

8.28 One particular issue is the type of skills that would be required by theDepartment to undertake efficiency auditing should this function berecommended.

8.29 Experience in other jurisdictions which have embarked on efficiencyauditing in a significant way, suggests that efficiency auditing requires theuse of a range of professional skills in addition to accountancy - theprofessional background of most auditors engaged in regularity audits.This is because efficiency studies focus on a wide range of managementdecision-making involving more than financial analysis and compliancewith the law.

8.30 Since undertaking efficiency auditing some years ago, the CanadianAuditor-General, a pioneer in the field, has adopted an approach toefficiency auditing involving multi-disciplinary teams. Currently, 18% ofthe Canadian Auditor-General's staff have been recruited fromnon-accountancy backgrounds (Advice from Canad.a Auditor General'sOffice, 1 October 1990).

8.31 In Queensland, the qualifications of audit staff employed in the Departmentof the Auditor-General reflect the regularity auditing orientation of theDepartment. In 1989/1990 the Department's establishment was 153,including 132 professionally qualified accountants, two other professionals(usually holding a degree related to commercial computing) and 19administration staff. No positions existed for professional audit staff withnon-accountancy backgrounds (QLD Auditor-General 1990b, p.15).

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Comment is invited on:

(a) the appropriate range and level of skills required for the Departmentof the Auditor-General to undertake its present functions effectivelyand whether any improvements are needed;

(b) what additional skills would be required to support an efficiency auditfunction.

RECRUITMENT AND RETENTION OF STAFF

8.32 In recent years, various audit offices in the Australian public sector havereported difficulties in retaining audit staff and recruiting appropriatereplacements.

8.33 Some staff are lost to departments and other public sector agencies. Butthe experience of at least two jurisdictions, South Australia and theCommonwealth, indicate that many are lost to the private sector, partly, itappears, because of significantly higher remuneration attaching to privatesector work (Report 296, pp.82-83; SA Auditor-General 1989, p.2).

8.34 In respect of the Commonwealth, Report 296 recommended that staffrecruitment problems could be eased if the ANAO were made a statutoryoffice outside the public service, and the Auditor-General given authority todetermine classification and remuneration standards for any staff, similarto that possessed by the Canadian and United Kingdom Auditors-General(Report 296, p.82). It was considered that this would enable theAuditor-General to:

"respond adequately to increased responsibilities, compete more effectively with theprivate sector (in terms of salaries offered) and structure the national audit office inline with current private sector practice" (ANAO 1989a, p.38).

8.35 Audit staff employed in the Queensland Department of the Auditor-Generalare employed under the Public Service Management and Employment Act1988. Remuneration is determined by a separate audit scale under thePublic Service Award State. This scale utilises a banding approach whichgives the Auditor-General a degree of flexibility in matching salary levels toskills and market demand. .

8.36 Despite this flexibility, the Auditor-General has reported a relatively highturnover of staff in recent years, although the problem has lessened inrecent months, possibly because of the present economic downturn. Theissue is raised whether any changed recruitment and remuneration policiesare needed to enable the Auditor-General to recruit and retain appropriatestaff and whether the Department of the Auditor-General should be made astatutory office outside the public service.

52

8.37 The latter option could be used to enable the Auditor-General to determine'remuneration standards outside the Public Service Award State. However,taking the Auditor-General's office outside the public service would notexclude the office from the jurisdiction of the Public Sector ManagementCommission (PSMC) which has been established by the Goss Governmentto develop management standards for statutory authorities anddepartments. In developing personnel policies for his or her office, theAuditor-General would still be required to conform to standards establishedby the PSMC unless the office were legally excluded from the jurisdiction ofthe PSMC.

8.38 Excluding the Auditor-General's office from the jurisdiction of the PSMCcould be appropriate to underscore the independence of the office from theExecutive, irrespective of whether exclusion would lead to greatermanagement flexibility for the Auditor-General. However, a disadvantageof this option could be the reduced opportunities for the Auditor-Generaland staff to benefit from the standards established by the PSMC eg.,promotion appeals. A compromise could be to exclude the Auditor-General'soffice from the jurisdiction of the PSMC but to allow the PSMC to act in anadvisory capacity to the Auditor-General on personnel and managementpractices for the audit office.

Comment is invited on recruitment, remuneration and staff developmentpractices affecting the capacity of the Department of the Auditor-General torecruit and retain staff necessary for the effective performance of theDepartment's functions.

Should the Department of the Auditor-General be made a statutory officeoutside the public service? If so, should the Department be excluded fromthe jurisdiction of the Public Sector Management Commission?

53

CHAPrER NINE

LEGISLATION

Financial Administration and Audit Act

9.1 The Financial Administration and Audit Act is based on the principle thatfinancial control is the responsibility of the Executive, while audit is thefunction of the Auditor-General with reporting responsibility to theParliament.

9.2 Reflecting this principle, the Act provides that standards relating tofinancial administration of departments and statutory bodies areestablished by the Treasurer, although the Auditor-General is required tobe consulted on proposed standards in which the Auditor-General may havean interest (s.46 L (2».

9.3 Before 1977, the Auditor-General's Department was required to playa moredirect role in establishing accounting standards for departments andstatutory bodies. It appears that, by default, this role continued to beexercised with respect to statutory bodies until the past few years with thedevelopment of finance standards for statutory bodies by the Treasury.

9.4 In view of the distinction between the standard setting role of the Treasuryand the audit function of the Auditor-General, it might be asked whether itwould be more appropriate to have separate legislation dealing withfinancial administration and audit.

9.5 Establishing a separate Audit Act might also serve to reinforce theindepende'nce of the Auditor-General from the Executive.

9.6 In the Corn.rD.onwealth, the Audit Act provides the legislative basis for bothfinancial administration and audit as does the Queensland FinancialAdministration and Audit Act. Report 296 has recommended thatCommonwealth legislation be repealed and replaced by separate financialadministration and audit acts in order to more clearly distinguish thefinancial control responsibilities of the Department of Finance and theaudit responsibilities of the Commonwealth Auditor-General.

9.7 An argument against having separate financial administration and auditacts is the convenience for administrators of having financialadministration and audit matters dealt with in the one document.

Comment is invited on whether the existing Financial Administration andAudit Act should be replaced by separate financial administration and auditActs.

Local Government Act

9.8 Under the Local Government Act, the Auditor-General is responsible forrecommending regulations covering local authority budgeting andaccounting practices. This responsibility has fallen to the Auditor-Generalsince the early years of local authority administration.

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9.9 The Department of Local Government discussion paper on the Review of theLocal Government Act has foreshadowed significant changes to currentregulations in order to modernise present day budgeting and accountingpractices in local government.

9.10 The paper does not address whether a continued' role for theAuditor-General in determining appropriate budgeting and standards isenvisaged.

9.11 Consistent with State Government practice, it might be considered that theAuditor-General should not have the responsibility for setting budgetingand accounting standards for local authorities, but should be consulted inthe course of any proposed standards relating to audit matters.

Comment is invited on whether the Local Government Act 1936 should beamended to remove the responsibility of the Auditor-General forrecommending budgeting and accounting standards for local authorities. Ifso, who should have this responsibility?

PART IIIINTERNAL AUDIT

55

CHAPTER TEN

TEE NATURE, PURPOSE AND SCOPE OF INTERNAL AUDIT

Definitions

10.1 The Institute of Internal Auditors (IIA) defines internal auditing as:

"an independent appraisal function established within an organisation to examineand evaluate its activities as a service to the organisation" (IIA 1989, p.l)

10.2 The objective of internal auditing is to assist the management of anorganisation to effectively discharge their lawful responsibilities. Internalauditors provide management with information about the adequacy andeffectiveness of the organisation's system of internal control and the qualityof performance (IIA 1989, p.1). Internal audit is an integral part of theinternal control process which functions by evaluating the adequacy of otherinternal controls. It is this responsibility that distinguishes internal auditfrom other management advisory and internal check functions.

10.3 The Auditor General of Canada has described a comprehensive internalaudit, properly organised and led, as one of the sharpest and most effectivetools available to management (Canada Auditor General 1978, p.222).

10.4 As well as the need for the effective review and appraisal of financialoperations and procedures, internal auditing must also be concerned withongoing reviews of overall organisational performance. Internal audit mustinclude assessments, verifications and the sponsoring of suggestions forimprovement. The 1981 Commonwealth Joint Committee of PublicAccounts listed among the critical success factors for internal audit thetechnological capability to review and analyse performance. Ultimately,internal audit should provide a comprehensive feedback facility to supportmanagement's financial and decision making systems. Management maythen determine whether or not government policies and the objectives, goalsand plans of the organisation are being achieved in the manner intended(Report 184 1981, p.2).

10.5 This definition was echoed by Monaghan (1989, p.171) who stated thatauditing is, by definition, the comparison of what happens compared withwhat should happen if the model established by standards is followed.

10.6 Dual functions of the auditing process are therefore the auditor's ability toobserve and measure, and the existence of performance standards withwhich to compare performance. When these performance standards havenot been established the first task of the internal auditor is to identify thecriteria that will be used.

10.7 Regularity auditing criteria in the Queensland public sector are provided bythe Financial Administration and Audit Act, and the Public FinanceStandards. Criteria for efficiency and effectiveness can be found in programmanagement plans and performance indicators established by departmentsand agencies. An essential component of independent internal audit is thatthe internal auditor is not involved in setting audit standards or any of theoperations to be audited.

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10.8 The scope of internal auditing therefore is limited only by the existence andapplicability of authoritative performance criteria and the authority andcompetence of the auditors. However, although the scope of internal audithas expanded to include performance evaluation, there is wide agreementthat internal audit's most important role is to provide assurance and adviceabout the economy, efficiency and effectiveness of the system of internalcontrols (ANAO Report 6 1990, p.10). Under the Act the size, nature andextent of internal audit activity is the responsibility of accountable officersand statutory bodies.

Legislative Mandate

10.9 The legislative mandate for internal audit is given in the FinancialAdministration and Audit Act and the Public Finance Standards. Sections36(2) and 36(3) of the Act require accountable officers as defined by that Actto examine from time to time the "nature and extent" of the internal auditorganisation, if any, in their departments. Where such an examinationdiscloses that there is a need for the establishment in the department of aninternal audit organisation or, as the case may be, for the augmentation ofan existing internal audit organisation, the accountable officer is to takesuch action as is considered necessary to establish and maintain an internalaudit organ.isation.

10.10 The Public Finance Standards are more prescriptive than the Act in respectof internal audit. Standard 610(1) states that:

"Each accountable officer and when determined by the statutory body or appropriateMinister, a statutory body shall make adequate arrangements for an independentinternal audit by officers or employees thereof or by external consultants, duringeach financial year."

10.11 In view of the apparent inconsistency between the Act and the Standardsthe question arises as to the legal requirement and the limits of managerialdiscretion on the establishment of an internal audit function.

10.12 As to the position in local authorities, there is no requirement in the LocalGovernment Act or Regulations for local authorities to establish a system ofinternal audit. However s.4(2)(i) of that Act allows the Auditor-General torecommend regulations in regard to various accounting and financialmatters.

Audit Standards

10.13 Public Finance Standard 610(2) requires accountable officers, and statutorybodies ~s determine:d, to sp~cifr the audit standards that are to be adoptedby the mternal audIt orgamsatIon. Standard 611(2) requires internal auditreports to indicate the terms of reference, scope of work undertaken, thestandards adopted, significant findings and recommendations.

57

10.14 Departments and statutory bodies are given some guidance on the selectionof standards for internal audit. The explanatory overview to the PublicFinance Standards recommends either the Standards for the ProfessionalPractice of Internal Auditing issued by the Institute of Internal Auditors, orthe Australian Auditing Standards issued jointly by the Australian Societyof Certified Practising Accountants and the Institute of CharteredAccountants in Australia (Qld Treasury 1990, p.vi).

10.15 While recognising the right of departments and statutory bodies to developtheir internal audit function to suit the needs of the organisation'smanagement, the NSW Public Accounts Committee has suggested that auniform approach to internal audit in the NSW public sector would not onlypromote efficiency but would also assist with the training and developmentof internal auditors (NSW Public Accounts Committee 1985, p.101).

10.16 Uniform standards have been developed by the Institute of InternalAuditors to serve tIthe entire profession in all types of business, in variouslevels of government, and in all other organisations where internal auditorsare found" (IIA 1989, p.iii). Further, the ANAO recently recommended thatstandards, based on the IIA's Standards and supplemented by practicestatements, be developed by the Department of Finance for Commonwealthpublic sector internal auditing (ANAO Report 6 1990, p.94).

Comment is invited on:

(a) the need for uniform standards of internal audit in the Queenslandpublic sector;

(b) the applicability of the ITA Standards or other professional standards;and

(c) the desirability of specifying professional internal auditing standardsby statute.

AuditCharter

10.17

10.18

It is a recognised principle of professional internal auditing that a charterbe established to define the purpose, authority and responsibility of internalaudit. A charter establishes the internal auditor's position within theorganisation, authorises access to records and personnel, defines the scopeof audit activities and defines the auditor's independence.

A common charter for Internal Operational Audit in the Queensland PublicService was established on 29 July 1980 and was administered by theOperational Audit Steering Committee. Cabinet Decision No. 33354commended its adortion in all departments with respect to the conduct ofinternal operationa audits. Because of the changes in administration thathave occurred since then, this charter now has an uncertain status. Therecently established Public Finance Standard 610(2) requires departmentsand statutory bodies to establish a charter for internal audit. However inkeeping with the flexible nature of those standards, no charter is prescrib~d.

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10.19 In the Commonwealth public sector over 70% of organisations with aninternal audit function have a charter. In the majority of theseorganisations the charter is endorsed by the chief executive officer and/orboard of directors. There would not appear to be any requirement to adopta common public sector charter (ANAO Report 6 1990, pA3). This is not thecase in Canada where the Comptroller General has defined a commoncharter for public sector internal auditors since 1982 (AustralianAccounting Research Foundation 1986, p.54).

10.20 The Commonwealth Auditor-General, although not going so far as toendorse a common charter, has recently asserted that support from seniormanagement, as evidenced by an endorsed, up-to-date charter, is animportant determinant of the effectiveness of an internal audit function(ANAO Report 6 1990, pA3).

Comment is invited on the need to establish a common charter that definesthe purpose, authority and responsibility of internal audit organisations inthe public sector.

IT such a common charter were to be established:

(a) who should endorse this charter and monitor its implementation; and

(b) what are its component parts?

IT a common charter is not desirable, are there segments of a charter thatmay, nevertheless, be common to all public sector organisations?

Types ofInternal Audit

10.21 The Government's expectations in establishing a broad scope internal auditfunction within departments and statutory bodies were clearly stated in the1977 explanatory memorandum to the Financial Administration and AuditBill. The internal audit function envisaged was a:

"continuous review of the systems and controls to ensure that they are appropriate inchanging circumstances and that they are adequate to ensure the efficient andeconomical conduct of business ... There is one aspect of this work still to bedeveloped in Queensland and that is measurement by the administration of "valuefor money" in expenditure .. , it is envisaged that the internal audit function shouldbe gradually developed to cover work in this field. " (Qld FinancialAdministration and Audit Bill 1977 - Explanatory Memorandum, pAl.

10.22 The need for a comprehensive internal audit function was supported by the1981 Commonwealth Joint Committee of Public Accounts. It considered(Report 184 1981, p.13) that, ideally, internal audits should include thefollowing three elements:

(a) financial and compliance (Regularity Auditing);

(b) economy and efficiency (Efficiency Auditing); and

(c) program results (Program Evaluation).

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10.23 The current Commonwealth Auditor-General has recently supported thisbroad scope audit role vvith his comment that internal audit can serve awide variety of purposes ranging from assessing the adequacy and integrityof certain information to evaluating the effectiveness of specific programs(ANAO Report 6 1990, p.35). However, a 1984 survey of internal audit inAustralia revealed that whilst there is agreement on the'traditional role ofinternal audit, there was quite a deal of confusion on the part of both chiefexecutives and internal audit managers as to the extent to which internalaudit extended beyond its traditional boundaries (Cooper and Craig 1987,p.53).

10.24 In Queensland, provision exists within the Financial Administration andAudit Act for internal audit to perform regularity auditing, efficiencyauditing and program evaluation. The term 'comprehensive auditing' isoften applied to these broad scope internal audit activities. In view of theevolutionary concept of this type of auditing, Parker suggests thatconsideration be given to the boundaries of other disciplines (AustralianAccounting Research Foundation 1986, p.38). For example the programevaluation and management consultancy functions will often overlap, or beconfused with, comprehensive auditing, particularly given the wide range ofactivities their roles encompass.

REGULARITY AUDITING

10.25 The Financial Administration and Audit Act and the Public FinanceStandards require accountable officers and statutory bodies to beresponsible for, among other things, ensuring that internal controls andchecks provide adequate safeguards with respect to departments andstatutory body's financial administration. Public Finance Standard 610(3)requires the annual work plan of the internal audit organisation, if it exists,to include verifications, checks and evaluations to determine the existence.and integrity of control systems, system appraisals and positionassessments. These terms are further defined in the following standards:

(a) Control Systems

Standards 210(1), 220(1), 230(1), 240(1) and 250(2) require adequatesystems to be established and maintained to monitor and ensurecontrol over revenue, expenses, assets, liabilities and equity.

(b) Systems Appraisals

Standards 210(3), 220(3), 230(3), 240(4) and 250(4) require systemsappraisals to be undertaken to determine the proper functioning ofcontrols and the appropriateness of procedures associated with theidentification, recording, management and control of revenue, expense,assets, liabilities and equity. ,

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. (c) Position Assessments

Standards 211, 221, 233, 242 and 251 require a position assessment tobe conducted each quarter. A position assessment is to cover anumber of organisational activities including a review of:

(i) the adequacy of earned revenue in terms of the cost recoverypolicy;

(ii) the expense of relevant individual operating units to assesswhether the cost of output is acceptable;

(iii) the efficient use of assets;

(iv) the capacity for meeting current economic and social objectives atthe required level in real terms; and

(v) the capacity to adapt to changes in government policy or in theeconomic or social environment.

10.26 It should be noted that internal audit does not perform the above activitiesbut audits, monitors and reports on the integrity of those systems.

EFFICIENCY AUDITING

10.27 AB discussed in para 2.11, the Financial Administration and Audit Actplaced heavy responsibility on accountable officers for the efficient andeconomical management of their organisations. In addition toresponsibility for the regularity and propriety of expenditure, the Act madeaccountable officers responsible for the operational efficiency of theirdepartments including responsibility for monitoring and measuringperformance.

10.28 A key provision of the Act was the establishment of modern internal auditorganisations to assist accountable officers in the efficient discharge of theirstatutory responsibilities. The explanatory memorandum accompanyingthe Financial Administration and Audit Bill defined the role that internalaudit was expected to play:

"... the Government is firmly of the opinion that a proper internal audit organisationshould be set up in major departments to regularly monitor performance ... " (QldFinancial Administration and Audit Bill 1977 ExplanatoryMemorandum, p.5).

10.29 Cabinet approved plans to facilitate the development of internal auditwithin the public service in July 1980. To emphasise the broad andstrategic role necessary to provide support for the accountable officer thisnew audit was to be called 'Internal Operational Audit'. The primaryobjective was to provide confidential, independent and impartial advice tomanagement as to whether activities audited are managed and controlledefficiently and economically and, in cases where there are deficiencies, toadvise management with regard to timely remedial action (QueenslandTreasury 1982, p.84).

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10.30 The internal operational audit function was to appraise the effectiveness ofa client department to discharge the functions and duties conferred orimposed upon the accountable officer. To this end internal operational auditwas to: .

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

review management systems and departmental operations regularly toassess the extent to which departmental objectives are achieved, andthe· adequacy of managerial controls over activities leading to suchachievement;

assess the relevance, reliability, and adequacy of management data;

appraise the extent of compliance with established policies, plans, andprocedures;

appraise past expenditure with regard to value for money obtained,and evaluate alternative expenditure;

determine whether the system of internal check is adequate and isfunctioning effectively and economically;

recommend improvements in procedures and systems to prevent wasteand extravagance;

advise the accountable officer on appropriate systems of control andother accounting and operational matters in a consulting capacity;

draw the attention of line management and if necessary theaccountable officer to failure by line management to take promptremedial action; and

(i) carry out any special appraisals, inspections, investigations,examinations or reviews for the accountable officer (QueenslandTreasury 1982, p.86).

10.31 The scope of internal audit was not limited by its enabling legislation andwas intended to provide a continuous appraisal of the efficiency andintegrity of the full range of organisational operations. This legislation hasnot been amended, however the range of internal audit in the public sectorat present does not appear to be consistent.

PROGRAM EVALUATION

10.32 AB discussed in Chapter Five, Public Finance Standard 310(2) requires aProgram Management System to include a five year Strategic Plan whichprovides a focus for annual budgetary and resource management strategiesand decisions.

10.33 The Pro~am Management System is to include a Performance Evaluationand RevLew System (program evaluation) as outlined in the PracticeStatement - Performance Evaluation and Review (PFS 1990, p.40). Thissystem is to determine whether the policies, goals and program objectivesremain appropriate and are being achieved and whether resources areoptimally allocated across programs and optimally utilized within eachprogram.

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10.34 All programs are required to be evaluated in terms of key performanceindicators at least annually and reports furnished to the Minister and onrequest to Treasury.

10.35

10.36

Internal Audit, as part of its function, is clearly concerned with on-goingreviews of overall organisational performance. The Public FinanceStandards appear to specify a role for internal audit in this performanceevaluation and review process. Standard 610(3)(v) prescribes that, wherean internal audit organisation exists, its annual work plan shall includesuch evaluations as are necessary to determine whether or not thereliability and integrity of financial and operating information has beenmaintained and that the criteria for the identification, measurement,classification and reporting of such information is adequate.

In addition, concern has been expressed by the Queensland 'Treasury thatdepartmental staff do not have the skills or resources to undertake programevaluation. A special program evaluation unit within Treasury Departmenthas therefore been set up to assist departments in this process as well as toundertake program evaluations directed by the Treasurer.

Comment is invited on the following issues:

(a) should internal audit conduct regularity and efficiency audits andprogram evaluation? IT so should aspects of this function be prescribedby legislation; and

(b) what role should internal audit play in the assessment of thePerformance Evaluation and Review System required for ProgramManagement?

63

CHAPrER ELEVEN

PROFESSIONAUSM OF INTERNAL AUDIT

11.1 An historic problem for internal audit within the public sector has been thefluctuating nature of management's support of this function. Reasonsadvanced for this are:

(a) that management do not fully appreciate the importance andrelevance of its work;

(b) the low level of resources allocated to the function; and

(c) lack of skills development and training of staff employed in internalaudit.

11.2 A major challenge for public sector management and internal auditors willbe to develop the proficiency and skills of internal auditors and a cleareridentity and quality of service.

11.3 In 1983/84 the NSW Public Accounts Committee found that there was someevidence to suggest that management had a generally low regard for theaudit function. It concluded that this problem was self-perpetuating;management lacks confidence in the ability of internal audit to conductbroader reviews and accordingly does not allocate resources to upgrade theability of the function (NSW Public Accounts Committee 1985, p.92).

Quality of Internal Audits

11.4 Although reviews of internal audit have been undertaken in otherjurisdictions no comprehensive review has been undertaken in theQueensland public sector.

11.5 In 1977, upon the enactment of the Financial Administration and AuditAct, accountable officers were required, pursuant to s.36(2), to examine thenature and extent of internal audit organisation within their departmentsand to report to the Public Service Board setting out the action considerednecessary to ensure adequate internal audit organisations were establishedand maintained. The results of those surveys have not been published.

11.6 At the Commonwealth level, the ANAO has conducted a number of surveysof internal audit functions and processes in the Commonwealth PublicService and found that most internal audit units were functioningeffectively. However, the surveys identified continuing shortcomings in thequality of internal audit work. The most common causes of concern were:

(a) failure to specify normative control models;

(b) failure ~o specify audit test rationales;

(c) inadequate documentation of systems and controls;

64

(d) general shortcomings in audit quality control and quality assurance;and

(e) failure to index properly and cross-reference audit working papers.

·11.7 Methodological issues were also identified including the need for changes inaudit methodology following changes to the financial and general legislativeframework. Some concern was also identified regarding the restricted scopeof internal audit activity (ANAO Report 6 1990, p.14 & pp.95-96).

11.8 A notable area of neglect in other jurisdictions has been audit of ElectronicData Processing (EDP) systems.

11.9 In 1983/84 the Institute of Internal Auditors (Australia) indicated that only20% of internal audit functions within the public sector catered for any form

. ofEDP auditing (NSW Public Accounts Committee 1985, p.98).

11.10 The 1989 ANAO survey found that, whilst over 70% of CommonwealthGovernment Departments rated their EDP systems and services as verysignificant to their organisation, less than 50% rated their internal audit ofthose systems at a similar level. Indeed, only 38% of respondents regardedtheir present level of EDP audit as adequate (ANAO Report 6 1990,p.142-143). .

11.11 The Fitzgerald Report found that each department's internal controls wereconcerned mainly with financial integrity. It suggested that even thoselimited internal mechanisms were very unlikely to expose errors orimproprieties as the controls depended on the integrity of seniordepartmental officers (Fitzgerald Report 1989, pp.130-131).

Comment is invited on:

(a) the adequacy of internal audit methodology and quality controlmeasures in the Queensland Public Sector; and

(b) the extent of internal audit involvement in EDP systems anddevelopment.

Staffing and Development

11.12 Without the appropriate staff resources and skills, internal audit unitscannot fully perform their allotted duties.

11.13 A USA Congressional investigation of program abuse found that seriousdeficiencies in the resources devoted to internal audits unduly prolonged thetime it took for all activities of a department or agency to be audited. Someofficials testified that it would take as long as twenty years to audit all ofthe agency's activities with its present resources. Other witnesses statedthat their departments had never audited some activities.

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11.14 Many agencies reported grossly inadequate audit and investigative staffing,often far less than half what they estimated would be needed. The criticalstaff shortages were particularly puzzling since testimony indicated thatadditional auditors would more than pay for themselves through savingsand recoveries. One agency, for example, estimated its ratio of savings tocosts at twenty to one. Moreover, the importance of adequate auditpersonnel was emphasised by a direct correlation between the number ofauditors and the number of fraud referrals to the criminal justice system(Muellenberg and Volser 1980, pp.1049-1051).

11.15 At the Commonwealth level, the Joint Committee of Public Accounts noteda decline in internal audit numbers in the Australian Public Service in1987-88. It commented that the staff reductions may have partly reflectedthe economies achieved after the machinery of government changes,including the formation of large departments. However, the Committeenoted that internal audit appeared particularly hard hit at a time whendepartments and authorities were facing new financial demands (Report296 1989, p.205).

11.16 The NSW Public Accounts Committee has asserted that if internal audit isto serve the broader role of reviewing efficiency and effectiveness,multi-disciplinary skills would be necessary together with a soundknowledge of management as a whole. It recommended that to supplementtheir existing knowledge and to keep them abreast of new auditingdevelopments and skills, all internal audit staff should receive at least thelevel of professional development or training each year as is specified byprofessional accounting bodies (NSW Public Accounts Committee 1985,p.95).

11.17 The 1989 ANAO survey identified developmental needs in the areas ofinternal audit staffing and audit organisation and management. Amongthe staffing issues identified were chronic difficulties in recruiting andretaining suitably qualified auditors. The survey found that only onequarter of the staff turnover resulted from internal auditors taking up auditduties elsewhere. Almost half of the staff turnover resulted from internalauditors taking up non-audit positions within their own organisations. Thismay indicate that internal auditors do not follow a conventional career pathwithin their profession (ANAO Report 6 1990, pp.61-62).

11.18 Also identified in the survey was the need to improve the professionalstanding of internal auditors, the need to broaden the skill base of auditors,and the need for better and more comprehensive professional training(ANAO Report 6 1990, pp.95-96).

11.19 The problems identified in other jurisdictions in relation to internal auditare presumed to also occur in Queensland. The consequences of the abovehave been:

(a) staff seeking appointment to audit positions for promotional reasons. rather than professional career development;

(b) people in internal audit roles have not had the capacity and experiencerequired to perform the full range of internal audit activities; and

66

(c) poor quality and reputation of the internal audit function III

departments.

Comment is invited on:

(a) the skills mix required by internal auditors in the Queensland publicsector to effectively undertake the designated role of professionalinternal audit;

(b) the need to Provide career paths for internal audit staff; and

(c) training, development and recruitment strategies required to addressthe issues identified for comment in (a) and (b) above.

67

CHAPTER TWELVE

ORGANlSATION OF INTERNAL AUDIT

Introduction

12.1 The Financial Administration and Audit Act and the Public FinanceStandards encourage accountable officers to establish and maintain anindependent internal audit organisation reporting to the accountable officer(s.36(2); s.36(6); s.46L; and Standard 610). For internal audit to be effectivein the evaluation of performance it needs to be independent of the levels ofmanagement being reviewed. This requirement for independence is alsostressed in the Standards for the Professional Practice of Internal Auditissued by the Institute of Internal Auditors (1989, p.5).

12.2 The independent status of internal audit within an organisation isestablished and maintained through appropriate reporting structures.Ideally, the chief internal auditor should be directly responsible to the chiefexecutive officer (NSW Public Accounts Committee 1985, p.90; ANAOReport 6 1990, p.43; s.36 (6), Financial Administration and Audit Act).

Independence

12.3 The independence of the internal audit organisation is a basic audit tenet.To the extent that it is feasible, internal auditors must not become involvedin decision making or become responsible for implementing therecommendations they make. The internal audit function must be, andmust be seen to be, independent of the functions which are audited(Australian Accounting Research Foundation 1989, p.6).

12.4 Regardless of the professional stance, others have suggested that in practiceauditors' independence is in many cases a myth (Senate StandingCommittee on Legal and Constitutional Affairs Report 1989, p.123).

12.5 Potential problems with the independence of internal audit have beenidentified in the public sector. The NSW Public Accounts Committee foundthat a serious weakness in internal audit could arise if the internal auditorganisation was responsible to a manager who was also directlyresponsible for the areas being audited. It asserted that any form ofinternal performance review needs to be independent of the manage~ent

being reviewed (NSW Public Accounts Committee 1985, p.90).

12.6 The Commonwealth Auditor-General has also expressed concern that asmall number of internal audit units in the Commonwealth Public Serviceare oversighted by the executive in charge of financial and accountingservices (ANAO Report 6 1990, pp.44-47).

12.7 In Queensland, the Financial Administration and Audit Act requires thatthe internal audit unit reports to the accountable officer or a nominee.Given the range of matters evaluated by internal audit, it is important thatinternal audit reports to positions with authority to sanction theimplementation of audit recommendations across all departmentalactivities. Generally, this authority resides only in the chief executiveofficer and deputy positions.

68

12.8 The Commission notes that this was the original intent of the FinancialAdministration and Audit Act. However, amendments to that Act in May1988 allowed accountable officers to delegate this authority to any otherofficer. A potential concern is that the power to delegate could result ininternal audit reporting to a level in the organisation which is too low toensure its independence and objectivity.

12.9 These problems are not confined to Australia. Extensive Congressionalinvestigations in the USA from 1974 to 1978 revealed shortcomings in theorganisational structures used by federal departments and agencies tocombat fraud and program abuse. With regard to organisational structure,hearings disclosed that in many instances, auditors at a single departmentor agency reported to different officials instead of operating under the sameleadership. In some cases there was no unit with agency-wide auditjurisdiction. In what the Congressional committee described as an exercisein futility, auditors were reporting to the very officials whose programs theywere supposedly auditing. These officials often resisted any review of theirprograms (Muellenberg and Volser 1980, pp.1049-1051).

12.10 The practice of using internal auditors as relief staff in accounting oroperational areas was also condemned (NSW Public Accounts Committee1985, p.90). Similarly, internal audit should not be involved in operationaltasks as it then cannot fulfil its responsibility to provide management withassurance and advice if it has operational responsibility for some of thesetasks (ANAO Report 6 1990, pp.44-47). On the other hand, short termsecondments to operational areas can give auditors useful hands-onexperience of problems in those areas and enhance the credibility of theiradvice to auditees.

Comment is invited on appropriate organisational and reporting structuresto ensure the independence of internal audit.

Involvement in Other Tasks

12.11 The Joint Committee of Public Accounts suggested that the internal auditfunction should be brought more closely into association with othermanagement advisory services (Report 184 1981, p.35). In later surveys ofthe internal audit function in the Commonwealth Public Service, the ANAOfound that several organisations had amalgamated their internal auditunits with other internal review functions such as management consulting(ANAO Report 6 1990, p.96). The Commonwealth Department of Financealso notes that internal audit, management review, research and analysisor policy development units provide departments with a general source forprogram evaluation units (Commonwealth Department of Finance 1989,p.6). .

12.12 However, the New South Wales Public Accounts Committee has questionedwhether internal audit should undertake consultative types of review. Itconcluded that, whilst reviews of this type have an important place in themanagement of many organisations, they serve a different purpose fromaudit. In addition, by maintaining its independence from a problem-solvingcon~u.ltancy group, interna~ aud~t shou~d not be placed in the position ofaudItmg the recommendatIOns It has Itself made (NSW Public AccountsCommittee 1985, p.9).

69

12.13 The ANAO has also expressed concern that this expanded role for internalaudit should not compromise internal audit's objectivity and its ability tofulfil its primary role; to provide management with independent assuranceabout the adequacy of the overall system of internal control (Report 6 1990,p.96). However, the ANAO was not necessarily opposed to amalgamation.Indeed, it believed that the effectiveness of the overall review functionwould be improved by the wider dissemination of professional audit skillsand the wider adoption of audit planning, reporting and quality assurancepractices (Report 6 1990, p.97).

Comment is invited on:

(a) the extent that internal audit's functions can or should be coInbinedwith those of other similar groups; and

(b) if the internal audit function is combined with other functions whatmeasures should be introduced to ensure the objectivity andindependence of the audit function?

Viability of Small Internal Audit Units

12.14 The doubtful viability of small internal audit units was recognised by theBjelke-Petersen Government in its strategy to establish an economicallyviable internal operational audit activity in the Queensland Public Service.A two tiered audit structure was established. Larger departments wereseen to warrant their own internal operational audit unit while smallerdepartments were to receive internal operational audit coverage from thecentral Internal Operational Audit Service attached to the TreasuryDepartment. The minimum size for an effective internal operational auditunit within a department was regarded as three officers. .

12.15 In 1988, the New South Wales Public Accounts Committee also reviewedthe position of small internal audit units. It concluded that organisationsthat could not justify a team of two internal auditors would probably find itmore cost effective to obtain contract internal audit services or shareresources with another authority (NSW Public Accounts Committee 1985,p.89).

12.16 These findings were supported by the ANAO survey of CommonwealthPublic Service internal audit which revealed that internal audit units ofless than three officers were more likely to have high ratios of inexperiencedstaff, high rates of staff turnover and unmet training needs. There was alsoreason to believe that small units may have an inadequate planned auditcoverage (ANAO Report 6 1990, p.70).

Comment is invited on:

(a) the quality of internal audit services delivered by small units; and

(b) the options for delivering an effective internal audit service to smallorganisations.

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12.17 Two options - establishing a central internal audit unit and the use ofcontract auditors - are discussed in the following pages.

CeIitral Internal Audit Unit

12.18

12.19

12.20

, 12.21

12.22

A13 outlined in the rrevious section, the Bjelke-Petersen Governmentestablished the centra Internal Operational Audit Service (IOAS) attachedto the Treasury Department to provide departments with an effectiveinternal operational audit coverage. The basic concept was that the centralbureau would operate as an internal system within departments reportingon a confidential basis to client accountable officers. It was not to be acentral agency review or consultancy function; however, the Director of theIOAS was responsible, in consultation with accountable officers, forassessing the effectiveness of operational audit activities in departmentsand to report periodically to the Internal Operational Audit SteeringCommittee.

This initiative was regarded as setting new directions in value for moneyauditing (Morse 1985, p.25). However, by 1987 there was some confusionwithin the public service as to the central bureau's role and objectives,particularly in relation to central management consultancy activities.

The Public Service Board submission to the Queensland Public SectorReview Committee (Savage Report) suggested that the bureau had lostsight of its original internal audit responsibilities and had sought to developa management consultancy focus in competition with the Public ServiceBoard (Brennan 1987, pp.44-45).

The Committee itself considered that the bureau should be disbanded andits resources transferred to the Auditor-General to enable theAuditor-General to undertake external efficiency audits. However, theCommittee did not address how the internal audit needs of smallerdepartments would be met following the abolition of a central internal auditunit (Savage Report 1987, p.70).

In rejecting the Committee's recommendations, the government establishedan independent Government Management Consultancy Bureau, attached tothe Premier's Department, by combining the IOAS with the ConsultancyServices Division of the Public Service Board (Qld Treasurer 1987). TheBureau was disbanded in 1989 by the Ahern Government.

Commonwealth Experience

12.23 A central agency similar to the IOAS was proposed by the 1981Commonwealth Joint Committee of Public Accounts. On balance thatCommittee thought that the establishment of a central internal auditbureau would lead to a more rational use of existing scarce auditingresources and the better determination of priorities. It recommended thecreation of an Internal, Audit Consultancy Bureau, attached to or supportedby the Commonwealth Public Service Board and independent from theAuditor-General's Office, but with links to it (Report 184 1981, p.37).

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12.24 The proposal did not find much support from departments or thegovernment. It was argued that the proposed bureau would become anotherexternal audit organisation.

12.25 The 1989 survey of internal audit in the Commonwealth Public Serviceconducted by the ANAO suggested that there was scope for improving theefficiency of the delivery of internal audit services in small organisations bythe wider use of central bureau arrangements. However, the ANAOacknowledged the previous concerns and instead suggested thatorganisations with internal audit units of less than three staff enter intodiscussions within their portfolio to canvas the possibility of extending thecoverage of existing internal audit units on a portfolio wide basis (ANAOReport 6 1990, p.70-71).

12.26 Central internal audit bureaux have been established by the New SouthWales and Northern Territory Governments.

Comment is invited on the role of a central internal audit unit. If such aunit was created:

(a) should it be restricted to a service role or also have a standardsetting/monitoring role for internal audit activities throughout theQUeensland public sector;

(b) should it be an independent body or be responsible to a central agency;and

(c) should its functions be established in legislation?

Comment is also invited on the alternative of sharing internal auditresources between departments and statutory bodies, perhaps withinportfolios. What authority would be required to enable this?

Contract Internal Audit

12.27 Public Finance Standard 610 provides for internal audit activities to beperformed by external consultants. In the USA, Canada and the UKprivate auditors have been seconded to or appointed to conductcomprehensive audits in the public sector (Australian Accounting ResearchFoundation 1986, p.56).

12.28 Contract internal audit services can benefit an organisation if its own auditresources or skills are limited, when there is a need to conduct a specialaudit or if the scale of an organisation's activities do not warrant theestablishment of a full time audit unit. It has been suggested that privatesector auditors provide government organisations with exposure tocommercial management's 'know-how'. The contract private sector auditorcan provide commercially sound advice about accounting and recordingpractices. However, this value-added audit service is significantly differentfrom that of advising clients as a management consultant (English 1990,p.19). Auditors, whether in the private or public sector, generally restricttheir activities to the identification of problems. Problem solving is themajor activity for management consultants (Australian AccountingResearch Foundation 1986, p.37).

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12.29 Notwithstanding this distinction, there is a growing emphasis by auditingfirms on providing consultancies as a by-product of the audit process(Craswell, 1988). Indeed, some government organisations may prefer toengage a private sector auditor for some internal audits because of readyaccess and the possibility of lower additional cost of these consultancyservices.

12.30 The Commonwealth Auditor-General has warned that contract internalaudit services can pose problems relating to access to certain types ofinformation and the potential for conflict of interest if the contractor alsoprovides services to the organisation's clients or competitors (ANAO Report6 1990, pAO).

12.31 Conflict of interest can also arise where an audit agency is required toaudit, for example, a financial management system designed by theconsultancy arm of that audit firm. To reduce this risk, accountancy firmsoften do not exchange information about a client between audit andconsultancy sections of the firm if that information is likely to reduce theintegrity of advice provided to clients.

12.32 To maximise the protection in relation to external audit, the JCPA recentlyrecommended that a condition of awarding a contract to a private externalaudit firm be that the latter offers no other services to the auditee duringthe life of the audit contract (Report 296 1989, p.117). However, theCommonwealth Auditor-General has suggested that a system of notification .of 'other services' contracts could overcome this conflict of interest problem.To the extent considered necessary, attention could be given by the externalauditor to the audit plan for that part of the audit where there may be scopefor a conflict of interest (ANAO 1989, pp.18-19).

12.33 The Public Sector Management Commission has recently issued guidelinesfor the use of consultants in the Queensland Public Service. Theseguidelines stress the need for proper management of contract consultancyservices to obtain value for money (PSMC 1990). The ANAO has alsoidentified the need for a closer management of contract auditors (ANAOReport 6 1990, pp.95-96).

Comment is invited on:

(a) the advantages and disadvantages of conducting internal audit bycontraet auditors; and

(b) the desirability of placing conditions on additional services performedby such auditors, having regard to the Queensland situation.

Audit Committees

12.34 In Queensland, the basis for the establishment of audit committees iscontained in the Financial Administration and Audit Act. Section 36(6)) ofthat Act an~ Publ~c Finance Standard 611(1) require internal audit reportsto be submItted dIrectly to the accountable officer. Where a committee orperson is nominated to review audit reports, such person or committee is toreport in writing to the accountable officer on a regular basis (PFS 611(3)).

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12.35 In 1980 the Queensland Public Service established a Central Internal AuditCommittee to determine development policy for internal operational auditactivity. AB previously mentioned the Director of the now disbanded IOASwas required to report periodically to that committee on the scope, quality.and type of internal audit work being performed in departments(Queensland Treasury 1982, p.88).

12.36 Audit committees are more commonly found in the private sector. In NorthAmerica, the role of audit committees received a great deal of attentionfollowing the discovery of the management-perpetrated 'fraud of thecentury' at the Equity Funding Corporation of America in March, 1973(Wolnizer 1980, p.52).

12.37 In 1975· the Canadian Government amended the Canada BusinessCorporations Act 1974 to require every Canadian corporation offeringshares to the public to have an audit committee. This was followed by theNew York Stock Exchange mandate of 1978. Specifically, each domesticcompany with common stock listed on that exchange was to establish andmaintain an audit committee comprised solely of directors independent ofmanagement (Spangler and Braiota 1990, p.135).

12.38 The Canadian Government continued this trend in the mid 1980s with anamendment to the Financial Administration Act 1970 that required Crowncorporations to establish audit committees (Canada Auditor General 1985,p.1). This Act now requires a parent Crown corporation that has four or.more directors to establish an audit committee of no fewer than threedirectors. In the case of a parent Crown corporation with less than fourdirectors, the board of directors of the corporation constitutes the auditcommittee. The duties of an audit committee, as defined in that legislation,include the duty to:

(a)

(b)

(c)

(d)

(e)

(f)

review .and advise the board of directors with respect to the financialstatements that are to be included in the annual report of thecorporation;

oversee any internal audit of the corporation;

review and advise the board of directors with respect to the annualexternal auditor's report of the corporation;

review plans and procedures to ensure appropriate integration andinter-reliance among internal audits, external audits and specialexaminations;

review and advise the board of directors with respect to anyquantitative performance information that is subject to audit and anyother accountability-related information released by the corporation;and

follow up on the implementation of recommendations made in internalaudit, annual audit and special examination reports.

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12.39 Following these overseas trends the Australian National Companies andSecurities Commission (NCSC) has recently recommended that each publiccompany board should have an audit committee (NCSC 1990).

12.40 Other duties frequently performed by audit committees include monitoringadherence to the corporation's code of conduct and initiating or overseeingspecial investigations into such matters as conflicts of interest, executiveexpenses and sensitive payments.

12.41 Audit committees are designed to provide an assurance to the board ofdirectors, over and above the formal reports of external auditors, that themanagement is maintaining adequate financial and other controls.Although audit committees are less common in the public sector, they havebeen established as committees of senior management primarily tooversight and review the operations of the internal audit function. Thisgenerally includes:

(a) reviewing internal audit's mandate;

(b) reviewing the internal audit program;

(c) reviewing internal audit reports and findings;

(d) ensuring that any corrective or preventative action required IS

implemented;

(e) reviewing the adequacy of internal Controls and accounting methods;

(f) reviewing the quality of internal audit's operations and capabilities;and

(g) maintaining effective co-ordination with external audit authoritiessuch as the Auditor-General.

12.42

12.43

12.44

A recent survey by the accounting firm Ernst and Young found that auditcommittees were a relatively new phenomenon in Australia. The surveyresults indicated that although 66% of all listed companies had an auditcommittee, those committees had been established for an average of onlyfive years (Ernst & Young 1990).

By contrast, the ANAO found that whilst all Commonwealth departmentswith an internal audit function had an audit committee, only 41% ofstatutory authorities with an internal audit function had such a committee.This was of concern for the ANAO in light of the greater emphasis onaccountability and commercialisation in these organisations (ANAO Report6 1990, pp.49-52).

The 1981 Joint Committee of Public Accounts considered that an auditcommittee's objectivity may be enhanced by the appointment of membersexternal to the organisation or possibly from outside the public service(ANAO Report 184 1981, p.15). The Commonwealth Auditor-Generalrecently endorsed this view. Noting that only 49% of audit committees hadsome external members the Auditor suggested there was room forimprovement. However in 27% of committees external members comprisedall or the majority of committee members (ANAO Report 6 1990, p.52).

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12.45 Despite the support that audit committees have generally received, othershave warned that they are not a panacea for deficiencies in financialscrutiny. Audit committees must rely on the organisation's internal andexternal auditors to bring problems to its attention (Senate StandingCommittee on Legal and Constitutional Affairs 1989, p.123; Wolnizer 1980,p.56).

The Commission invites comments on the application of the auditcommittee model to:

(a) government owned enterprises;

(b) statutory bodies;

(c) local government; and

(d) departments.

Comment is also invited on the desirability of the establishment of auditcommittees by legislation or other means and whether their membersshould include people external to the organisation and the public service.

Comment is also invited on the desired relationship of audit committees toTreasury and the Auditor-General and, in the case of local authorities, theDepartm.ent of Housing and Local Government.

76

CHAPI'ER THIRTEEN

FRAUD

13.1 As suggested in Chapter Four, the Financial Administration and Audit Actplaces primary responsibility for the prevention and detection of fraud anderror with management through the implementation and operation of anadequate system of internal checks. This managerial responsibility wasreasserted by the 1987 Commonwealth Government review (the McGaurrCommittee) of the systems for dealing with fraud in government agencies.That Committee recommended that principal responsibility for theprevention and detection of fraud rest with agencies affected (McGaurrCommittee 1987, p.38).

Fraud Prevention and Detection

13.2 The McGaurr Committee found that few agencies had clearly developedstrategies for controlling fraud against their programs. It developed aworking document to assist agencies in assessing and upgrading systemsfor dealing with fraud. The document identified six phases for assessingfraud prevention and detection systems:

Risk

Design

Operation

Referral

Awareness

Analysing all programs for which the agency is responsibleand identifying the risks of fraudulent activity;

Structuring controls over admission to programs in order toprevent fraudulent activity;

Performing exercises to detect fraud within programs;

Developing guidelines in relation to administrativeremedies and reference of matters to investigation andprosecution;

Sharing information with other agencies developingeffective publicity/deterrence strategies; and

Review Monitoring and assessmg the effectivenessprevention and detection arrangementsCommittee 1987, pp.195-196).

of fraud(McGaurr

13.3 The Committee recommended that all agencies be required to pursue asystematic and explicit approach to fraud control (McGaurr Committee1987, p.39). However, the ANAO found that only half of the CommonwealthGovernment organisations surveyed in 1989 had involved their internalaudit function in any way with the implementation of thatrecommendation. Of those, the major aspects of fraud control in which theinternal audit function had been involved was risk analysis and thepreparation of fraud control plans (ANAO Report 6 1990, p.120). .

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13.4 The Institute of Internal Auditors (IIA 1984, pp.4-5) has suggested that theinternal auditor's responsibilities in the detection of fraud are to:

(a) maintain sufficient knowledge of patterns of fraud to be reasonablyeffective in determining the adequacy of controls;

(b) be alert to opportunities for potential perpetrators to commit fraud;

(c) be alert to evidence that indicates fraud might have been committed;and

(d) pursue evidence that indicates fraud might have been committed.

13.5 If, after pursuing additional checks, internal auditors cannot corroborate orrepudiate the initial evidence of suspected fraud, they are advised toreconsider the evidence. If the evidence is significant in terms oflotentia1damage to the organisation or society, it should be reporte to theappropriate authority within the organisation as uncorroborated evidence.

13.6 Once a determination is made that there is sufficient evidence of theexistence of fraud to recommend an investigation, the internal auditorshould notify the appropriate authorities. Responsibilities for reportingsuspected fraud in the Queensland public sector are defined in PublicFinance Standard 234. Under Section 2.28(2) of the Criminal Justice Act,there is also a requirement to report suspected cases of official misconductto the Criminal Justice Commission.

13.7 Persons within an organisation reporting cases of suspected fraud or misuseare often referred to in the literature as 'whistleblowers'. Because thesepeople are vulnerable to intimidation or retaliation by powerful individualswithin the organisation, special protection mechanisms have beendeveloped.

13.8 The issue of whistleblower protection will be addressed in greater detail inEARC Issues Paper No.10 (see also para 13.26).

Comment is invited on the role of internal auditors in fraud prevention anddetection.

Fraud Investigations

13.9 In Queensland departments and statutory bodies, the investigation of fraudis covered by Public Finance Standard 234. That Standard requires that ifany loss may have arisen from a cause that could constitute an offenceunder the Criminal Code or any other Act or law, notice in writing is to begiven to a member of the Police Service and to the Auditor-General. Apartfrom reporting the suspicion of fraud to those bodies, no guidance is givenon the responsibilities for investigating suspected fraud.

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13.10 In the Commonwealth arena, the McGaurr Committee recommended thatall agencies accept responsibility for investigating routine instances of fraudagainst them. Only the more complex and larger scale investigations wereto be referred to the Australian Feder.al Police for investigation (McGaurrCommittee 1987, p.2). The ANAO 1989 survey found that only 30% ofCommonwealth Government organisations involved their internal auditfunction in the investigation of fraud (ANAO Report 6 1990, p.120).

13.11 Hit is decided to involve the internal audit function in an investigation intosuspected fraud, internal auditors are advised by the Institute of InternalAuditors (IIA 984, pp.17-18) to:

(a) make a concerted effort to determine the probable level of complicitywithin the organisation;

(b) identify alternative ways in which the fraud could have beenperpetrated;

(c) determine the knowledge, skills and disciplines needed to effectivelycarry out the audit investigation;

(d) maintain liaison and coordinate activities with consultants andmanagement throughout the course of the investigation;

(e) attempt to interview the parties involved as soon as a determinationhas been reached that the investigation has gone as far as it can orshould go; and

(D assess controls which need to be implemented to reduce futurevulnerability, and audit tests which should be instituted to disclosethe existence of such a fraud in the future.

13.12 Fraud investigation is a special area and may require skills over and abovethose possessed by internal auditors. There is a risk that if aninvestigation is· not properly handled it could jeopardise a prosecution orexpose the investigator to litigation. The McGaurr Committee found thatwith a few exceptions there was little or no training of agency staff in theprevention, detection or investigation of fraud. It recommended thatagencies determine their requirements for training in consultation with theAustralian Federal Police, the Australian Government Solicitor and theDirector of Public Prosecutions (McGaurr Committee 1987, p.86).

13.13 The Institute of Internal Auditors advises internal auditors that otheragencies may have to rely on their work. Consequently, evidence gatheredmust be properly classified, meticulously prepared and should be devoid ofaccusatory, inflammatory or unsupported commentary.

Comment is invited on the respective responsibilities of internal auditors,external auditors and criminal justice agencies in conducting fraudinvestigations in the public sector.

13.14

13.15

13.16

13.17

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The USA Inspector General Model

In an attempt to combat fraud and waste in government programs the USACongress initiated significant legislative changes to federal departmentaladministration. These changes may not be directly transferable to theQueensland system. of Westminster government, however they arepresented here to expand debate on the issues under review.

The resources and procedures used by federal departments and agencies forthe prevention and detection of fraud and program abuse were investigatedextensively by the USA House of Representatives and Senate from 1974until 1978. It was found that auditors were not adequately recognisingfraud. Further, auditors and fraud investigators were not communicatingwith each other.

The solution adopted by the House Intergovernmental Relations andHuman Resources Subcommittee was to have a very senior official withinthe organisation in charge of both functions. This official, called anInspector General, was given broad authority to investigate, audit andreport. Congress established the Office of Inspector General for theDepartment of Health, Education and Welfare in 1976. Problems at theDepartment of Energy led Congress to establish an Office of InspectorGeneral there in 1977. Congress subsequently abandoned its ad hocapproach to the problem of fraud and abuse in October 1978 when it passedthe Inspector General Act 1978 creating offices of Inspector General inanother twelve departments and agencies.

The legislative history of the Inspector General Act shows that bothCongress and the President intended that the Inspectors General havebroad rowers and functions which would combine responsibilities forinterna audit and fraud investigation. Specifically the duties andresponsibilities of the Inspector General include:

(a) providing policy direction for the audit and investigative activities ofthe agency;

(b) reviewing existing and proposed legislation and regulations relating toprograms and operations of the agency and making recommendationsconcerning the enforceability of such legislation and regulations to thehead of the agency and to Congress;

(c) supervising other activities for the purpose of promoting economy,efficiency, and effectiveness in the administration of such programs orpreventing and detecting fraud and abuse in such programs;

(d) co-ordinating relationships between the agency and other federal,state, and local governmental agencies and non-governmental entities;and

(e) keeping the head of the agency and Congress fully and currentlyinformed concerning fraud and other serious problems in the operationof agency programs.

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13.18 The Inspectors General have an unparalleled degree of independence inperforming these duties. The President, with the approval of the Senate,appoints the Inspectors General who cannot be removed by the agency head,only by the President. However, the President must communicate reasonsfor doing so to the Congress.

13.19 The law specifies that the Inspector General shall not report to, or besubject to supervision by, any official other than the head of the agency orthe person next in rank. Moreover, the head of the agency may not prohibit,prevent, or limit the Inspector General from undertaking any audits orinvestigations deemed necessary, or from issuing any subpoenasnecessitated by such audits and investigations.

13.20 The independence of the Inspectors General from the control of theiragencies is ensured in part by the reporting functions required by theInspector General Act. Twice a year each Inspector General must account toCongress for actions taken or contemplated. These semi-annual reportsinclude the following:

(a) a description of significant problems, abuses, and deficienciE;!s in theadministration of programs and operations;

(b) recommendations for corrective action;

(c) identification of all previous significant recommendations In whichcorrective action has not been completed;

(d) a summary of matters referred to prosecutive authorities andprosecutions and convictions which have resulted;

(e) a summary of each report made to the head of the· establishmentrelating to information or assistance requested by, but not provided to,the Inspector General; and

(f) a listing of each audit report completed during the reporting period.

13.21 Within 60 days of the report going to Congress, the agency head must makecopies of the report available to the public at a reasonable cost.

13.22 In addition to the semi-annual reports, the Office of Inspector General ISaccountable to Congress in two other ways.

13.23 First, the Inspector General must comply with the auditing standardsestablished by the General Accounting Office (GAO), an agency whichreports directly to Congress. The Act requires that activities beco-ordinated with the GAO to avoid duplication of effort.

13.24 Second, the Act requires that whenever the Inspector General becomesaware of particularly serious or flagrant problems, abuses, or deficienciesrelating to the administration of programs and operations, the head of theagency must be notified immediately. The head of the agency then musttransmit the report and any comments to Congress within seven days. Theindependence of the Inspector General is essential not only to ensurecomprehensive audit and examine controls, but also to preserve theintegrity of the system.

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Access to Information

13.27 The whistleblower provision is only one of several prOVlSlons of theInspector General Act that provides the Inspector General with access torelevant information. Internally, each Inspector General, in carrying outthe provisions of the Act, is authorised to have access to all records or othermaterial available to the agency which relate to programs and operationswith respect to which the Inspector General has responsibilities.

13.28 Furthermore, in actions involving other agencies, direct and prompt accessto the head of the agency involved, when necessary, is provided for anypurpose pertaining to the performance of the Inspector General's duties.This provision has been treated by the Inspectors General as an informationand asset-sharing device. It has been found that many problems affectseveral agencies. As a result, the Inspectors General and representatives ofthe Department of Justice meet frequently to discuss matters of commonconcern. The Inspectors General also created a Committee on InteragencyCooperation to study the areas in which combined efforts to combat fraudand abuse would be most effective (Muellenberg & Volser 1980,pp.1049-1051).

The Model in Australia

13.29 The Commonwealth has recently established a position of Inspector-Generalto perform a similar role in the Department of Defence. Essentially theposition reports directly to the Secretary, Department of Defence andprovides a comprehensive and independent oversight of the DefenceDepartment's activities as part of the checks and balances of greaterdelegated responsibility to line managers. This is achieved by combiningcomprehensive auditing methodologies with activities aimed specifically atcurtailing and investigating fraud. The Inspector-General also acts as thecontact point for the ANAO and the Commonwealth Joint Committee ofPublic Accounts.

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13.30 However, thelosition of Inspector-General in the Defence Department isnot establishe by legislation and does not report to Parliament.

13.31 A model of a combined investigation and audit function established bylegislation with mandatory external reporting requirements is provided bythe NSW Department of Local Government. .

13.32 The NSW Local Government Act 1919 provides for the appointment. by theGovernor, of inspectors of local government accounts (s.212). Under thatAct these inspectors may inspect the accounts of the councils and theinternal organisation and management of the council's offices. This is inaddition to the external audit of the council's accounts. Inspectors arerequired to report on any irregularity, dishonesty, or breach of law revealedby their inspection, and may report on any other matter which calls forspecial notice. To assist them in this role inspectors have wide powers totake evidence on oath and to summons witnesses (s.214).

13.33 Administratively these inspectors are officers of the Special Investigationsand Management Audit Branch of the Department of Local Government.They have two major roles:

(a) to conduct special investigations of alleged malpractices by councils;and

(b) to conduct regular financial and management inspections.

13.34 Special investigations may arise out of allegations of malpractice madedirectly by the public or referred by other bodies. The major sources ofreferred allegations are the Independent Commission Against Corruption(ICAC) and the Ombudsman.

13.35 Financial and management inspections are essentially performancereviews. They focus on corporate management and financial andoperational planning. To ensure regular inspections councils are selectedon a rotational basis. However, an individual council may request aninspection at any time.

13.36 All reports on inspections are to the relevant council and to the Minister forLocal Government. To reinforce the commitment to accountablegovernment, councils must make these reports available to electors at thecouncil's office (s.215). The council must also notify the Minister within 40days of receipt of the report as to the action it proposes to take on thereport's recommendations.

13.37 It should be noted that although the Queensland Local Government Acts.4A(3) contains similar powers it appears they have never been used in asystematic way. That Act enables 'the Director' of the Department ofHousing and Local Government, or a delegate, to make inspections,investigations and inquiries in relation to any matter in respect to theadministration of that Act. The relevant Minister has even greater powersand may direct an inspection into any matter.

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13.38 For the purposes of conducting an investigation the Director or theirdelegate are given all of the powers, authorities, protection and jurisdictionof a commission under The Official Inquiries Evidence Acts, 1910. Reportson such investigations are only requited by the Local Government Acts.4A(3)(iv & v) to be furnished to the Director or the Minister. Unlike theNSW model there is no requirement to provide the local authority orelectors with a copy of the resulting report.

The Commission seeks comments on the Inspector General model, or othersimilar model of fraud investigation and audit, and its application to theQueensland public sector.

Comment is also invited on appropriate techniques and the skills andexperience of staff involved in the prevention, detection and investigation offraud in the Queensland public sector. Are guidelines required, if so whoshould develop these?

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CHAPrER FOURTEEN

RELATIONSHIP WITH AUDITOR-GENERAL

14.1 Despite the differences between internal and external audit there aresimilarities and the two are complementary. To the extent thatorganisational and professional constraints allow, internal audits should beconducted in a manner that allows maximum co-ordination andconservation of internal and external audit resources.

14.2 Section 57A of the Financial Administration and Audit Act requires theAuditor-General in conducting audits to have regard to the character of theinternal control, including the internal check and internal audit, and torecognised professional standards and practices.

14.3 Although both internal and external audit are concerned with providingassurance about the effectiveness of the system of internal control, theinternal auditor is employed by and accountable to management whereasthe external auditor is employed by and is accountable to management'semployers. These different reporting relationships require someindependence to be maintained between the two audit roles. The issue isthe extent to which independence should be achieved at the expense ofduplication of audit resources.

14.4 The ANAO identified five areas where an Auditor-General could be involvedin internal audit (ANAO Report 6 1990, p.87). These are:

(a) involvement in the formulation and revision of internal audit workplans;

(b) representation at meetings of audit committees;

(c) receipt of copies of internal audit reports;

(d) provision of advice to internal auditors on auditing standards andmethods; and

(e) provision of assistance in internal audit training.

14.5 The ANAO found that internal audit at times was the contact point forAuditor-General enquiries and requests for information and assistance.Internal audit was sometimes also involved in preparing the organisation'sresponse to Auditor-General findings and recommendations.

14.6 The ANAO concluded that there was both a demand and a prima facie casefor a closer relationship between the ANAO and internal audit throughcloser co-ordination of audit work programs. This could be achieved by theANAO providing internal audit with more information about its auditprogram and auditees involving the ANAO more in the meetings of theiraudit committees. However, the ANAO was opposed to the external auditordisclosing beforehand to the internal auditor the details of the scope andtesting planned for a particular audit (ANAO Report 6 1990, p.89 & p.96).

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14.7 The Institute of Internal Auditors' Standard 550.02 suggests that thisaccess may be important for the internal auditor to be satisfied as to thepropriety for internal audit purposes of relying on the external auditor'swork.

14.8 The Commission understands that the Queensland Auditor-General doesnot allow the Department's auditors to reveal audit modus operandi or testrecords to the internal -auditor. However, the Queensland Auditor-Generaldoes suggest that access to the internal auditors' programs and workingpapers would allow the external auditors to be satisfied as to the propriety,for external audit purposes, of relying on the internal auditors' work (QLDAuditor-General 1984, p.139).

Comment is invited on:

(a) the scope for maximising the audit coverage, including sharing of theaudit task between the external and internal auditors; and

(b) the extent to which the Auditor-General should disclose in advancedetails of the scope and testing planned for particular audits.

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CHAPrER FTITEEN

SUMMARY

15.1 The Electoral and Administrative Review Commission is conducting areview of Queensland public sector auditing in response torecommendations of the Fitzgerald Commission of Inquiry (FitzgeraldReport 1988, p.371, recommendations 10(g), 10(1) and II(g)).

15.2 The object of the review is to make recommendations for the effective auditof all Queensland public sector organisations.

15.3 The Issues Paper focuses on external audit and internal audit. Both typesof audit are complementary and each playa central role in the process bywhich government agencies are accountable for the honest and efficient useof resources entrusted to them by the Parliament.

15.4 In the public sector, external audit is usually the responsibility of theAuditor-General who is a statutory officer independent of the Executive.The Auditor-General audits the accounts of government agencies, providesan opinion on financial statements and reports to Parliament on significantissues arising from audits.

15.5 By contrast, internal audit is responsible directly to agency management.Internal audit advises the agency management on the effectiveness ofinternal control systems and on agency performance in order to assistmanagement to effectively discharge its responsibilities.

Auditor-General

15.6 Under the Financial Administration and Audit Act and certain other Acts,the Queensland Auditor-General audits the accounts of the Treasurer,departmental accounts and the accounts of statutory bodies and associatedbodies.

15.7 Under the Local Government Act the Auditor-General is also responsible forthe audit arrangements oflocal authorities.

ISSUES RAISED BY FITZGERALD

15.8 The Fitzgerald Report raised several issues in relation to the operations ofthe Queensland Auditor-General which are explored in this Paper.

15.9

Regularity Auditing

One is the adequacy of present approaches by the Department of theAuditor-General to regularity auditing. Regularity auditing is thepredominant type of audit performed by Auditors-General and is concernedwith examination of accounts and financial statements in terms of theiraccuracy and compliance with the law.

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15.10 In recent years, the Department of the Auditor~General has adopted asystems-based approach to auditing where emphasis is placed on theintegrity of financial control systems rather than detailed examination oftransactions. However, the Fitzgerald Report implied that such anapproach - although consistent with professional developments - could leadto inadequate investigation of individual expenditures and hence increasethe opportunity for irregularity or fraud. The Issues Paper raises whetherchanges could be made to present audit approaches to enhance the capacityof the Auditor-General to assist in detection of irregularity and fraud.However, it is noted that modern management philosophy places primaryresponsibility on chief executives for ensuring that financial systems andaccounting procedures comply with the law.

Reporting to Parliament

15.11 A second issue identified by the Fitzgerald Report is the adequacy ofreporting by the Auditor-General to Parliament on significant auditfindings.

15.12 Examination of the annual reports to Parliament produced by theQueensland Auditor-General indicate that significantly less comment isproduced on audit findings and recommendations than contained incomparable reports in some other States and Territories. Part of the reasonhas been the objective of the Auditor-General to aim at prevention ofproblems rather than post event detection, and to avoid public washing of'dirty linen' where problems appear to have been satisfactorily resolved bymanagement. The Issues Paper suggests, however, that expanded reportingmay be appropriate to ensure that Parliament is adequately informed ofsignificant issues and trends arising from audits.

Audit Resources

15.13 The Fitzgerald Report recommended that adequate resources should begiven to the Auditor-General to enable the external audit role to beperformed satisfactorily.

15.14 The issue of resources will be addressed by the Commission following thereview of the Auditor-General's functions and operating procedures, sincethe recommendations emanating from this review may have an impact onthe resource requirements of the Department.

OTHER ISSUES

15.15 Other issues which relate to the capacity of the Auditor-General to providean independent and effective check on the use of public money are outlinedbelow.

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Efficiency Auditing

15.16 The Paper discusses the trend in other jurisdictions for Auditors-General tobe given authority and resources to conduct efficiency audits. Efficiencyaudits go beyond examination of regularity to investigation of the efficiencywith which programs or services are achieving their objectives. Comment issought on whether the Auditor-General should be given authority andresources to undertake efficiency audits into government agencies, and thescope of this activity.

Audit of Statutory Bodies

15.17 In recent years, a debate has occurred within Australia over the extent towhich private audit firms could be allowed to audit government accounts,particularly those of statutory bodies, without compromising public sectoraudit standards and the accountability of the audit process to Parliament.Two major issues have emerged:

(a) the extent to which private firms could be utilised by Auditors-Generalto audit financial statements and accounts on the Auditor-General'sbehalf where the Auditor-General is the statutory auditor; and

(b) the extent to which the Auditor-General should be required to competewith private sector firms to undertake audits of government businessenterprises.

15.18 In Queensland, the principle has been accepted that the Auditor-Generalshould be the statutory auditor of all statutory bodies. In accordance withits interpretation of this principle, the Department of the Auditor-Generalitself conducts audits of most statutory bodies rather than contracts out toprivate firms.

15.19 The Issues Paper asks whether scope exists to allow contract auditing bythe Auditor-Ger'-:J and the implications of this for financialaccountability. :' raised is whether any government enterprisesestablished by thE: JOss Government should be allowed to appoint their ownauditor bearing in mind concerns raised in the Commonwealth Parliamentabout decisions of the Hawke Government to allow certain Commonwealthgovernment enterprises to choose their auditor.

Audit of Local Authorities

15.20 Since the beginnings of local authority administration in Queensland, theAuditor-General has been responsible for audit arrangements of localauthorities. The practice is for the Auditor-General to' appoint privatesector auditors who then report to the Auditor-General on the conduct ofaudits and audit findings. In the case of the Brisbane City Council, theAuditor-General's Department itself undertakes the audit in accordancewith a requirement of the City of Brisbane Act. This requirement arose fromdisquiet in the 1930s about financial management practices of the thenBrisbane City Council.

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15.21 The Issues Paper seeks public comment on the adequacy of present auditarrangements for local authorities. Comment is also sought on whether itis necessary for the Auditor-General to have direct responsibility for theconduct of audits of the Brisbane City Council in order to ensure effectiveaccountability.

Appointment of the Auditor-General and Determination of theAuditor-General's Budget

15.22 In Australia, Auditors-General are appointed by the Governor orGovernor-General in Council on the recommendation of the government.Recent reviews of the Commonwealth, New South Wales and WesternAustralian Auditors-General have pointed to overseas models whereParliament (usually a Parliamentary committee) plays a significant role inthe selection of candidates to fill vacancies in the position ofAuditor-General. The reviews have recommended that similararrangements apply in their respective jurisdictions for the purpose ofstrengthening the independence of the Auditor-General.

15.23 The Commonwealth and Western Australian reviews have also suggestedthat Parliamentary committees should have greater involvement indetermining the annual budget allocation for the Auditor-General's officeconsistent with practice in Canada and the United Kingdom.

15.24 The Issues Paper examines these propositions and raises their applicabilityto Queensland.

Human Resource Management

15.25 Also discussed is whether the Department of the Auditor-General should bemade a statutory office independent of the Executive (including the PublicSector Management Commission). Possible advantages of this optioninclude greater flexibility for the Auditor-General in determiningremuneration standards for audit staff and further strengthening of theprinciple of audit independence.

Internal Audit

15.26 The Fitzgerald Report emphasised the role of internal audit In theaccountability process within departments.

THE SCOPE OF INTERNAL AUDIT

15.27 By comparison with the Auditor-General, the mandate for internal audit inthe Queensland public sector appears somewhat ill-defined, although thereis general agreement in the professional literature as to its extent. TheIssues Paper reviews contemporary developments in public sector financialmanagement and seeks to identifY a consistent role and authority forinternal audit in the Queensland public sector.

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EFFECTIVENESS OF INTERNAL AUDITS

15.28 The Fitzgerald Report recommended that a review of the effectiveness ofinternal audit units be conducted within Queensland governmentdepartments and instrumentalities. In line with this recommendation, thePaper raises the twin issues of the quality of internal audits and the stafftraining and development required for effective performance of the internalaudit function. The Paper seeks comment on the adequacy of auditmethodology and quality control measures. Comment is also sought on themi...,;: of skills required of internal auditors.

15.29 Issues relating to the organisation of internal audit units are alsoidentified. A major concern is the maintenance of the independence of theinternal audit function. Alternative organisational forms for the delivery ofinternal audit services are also raised. The Issues Paper seeks comment onappropriate organisational and reporting structures and options fordelivering an effective internal audit service to small organisations.Comment is also sought on the utility and composition of audit committees.

FRAUD PREVENTION AND DETECTION

15.30 The Paper examines the responsibilities of internal audit to prevent anddetect fraud and program abuse. An alternative organisationalarrangement involving a combination of traditional internal audit andfraud investigation duties is presented for comment.

RELATIONSHIP WITH THE AUDITOR-GENERAL

15.31 Finally, the potential for overlap and underlap in audit coverage betweeninternal audit and the external audit of the Auditor-General is discussed.The scope for achieving economy in the use of audit resources throughsharing of the ap.dit task between these two functions is also raised.

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CHAPrER SIXTEEN

ISSUES FOR PUBLIC COMMENT

16.1 The Electoral and Administrative Review Commission invites submissionson all or any of the following issues:

Auditor-General

SCOPE OF AUDIT RESPONSIBILITY

16.2 Should the Auditor-General be required to audit the accounts of a publiccompany associated with a department? (para. 3.8)

16.3 Should all government-owned enterprises established by the QueenslandGovernment be audited by the Auditor-General or should they be allowed tochoose their own auditor? (para. 3.19)

16.4 Should government enterprises be audited according to the requirements ofthe CQ:mpanies Code or standards similar to those applying to the audit ofstatutory bodies? (para. 3.19)

16.5 Should the Auditor-General be allowed to engage private audit firms for theaudit of statutory bodies and government departments where theAuditor-General is the statutory auditor? If so, what procedures shouldapply to enable the Auditor-General to engage private contractors and tomonitor their perfarmance in meeting public sector audit standards? (para.3.10)

16.6 Are present arrangements for external audit of local authorities and theBrisbane City Council satisfactory? Are any changes required to enhanceaccountability or the efficient delivery of audit activities? (para. 3.35)

REGULARITY AUDITING

16.7 To what extent are present external audit approaches in the Queenslandpublic sector effective in ensuring compliance with the law and financialaccountability? What changes could or should be i:mplemented Wstrengthen current approaches? (para 4.1)

EFFICIENCY AUDITING

16.8 Should the Auditor-General conduct efficiency audits? (para. 5.1)

16.9 Should the Auditor-General have authority W conduct efficiency audits inwstatutory authorities and government enterprises as well as departments?(para. 5,,27)

16.10 Should the Auditor-General be required to undertake efficiency audits of allmajor government activities over a defined cycle? (para 5.33)

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16.11 If the Auditor-General is given an efficiency audit function, what aspects ofthis function should be prescribed in legislation? (para. 5.1)

16.12 What role, if any, should the Auditor-General play in program evaluation?(para. 5.43)

16.13 What role, if any, should the Auditor-General play in monitoring andreporting on the quality of performance indicators produced by auditees?(para. 5.48)

REPORTING

16.14 Should all audits conducted by the Queensland Auditor-General besummarised in an annual report, or in more frequent reports, toParliament? (para. 6.1)

16.15 Should more substantial snmmaries of significant audit findings beincluded in these reports? (para. 6.1)

16.16 Should the Auditor-General be required to report to Parliament oncircumstances where recommendations arising out of audit findings havebeen implemented by management? (para. 6.1)

16.17 Should the Auditor-General be required to report to Parliament on allspecial investigations undertaken at the request of Ministers and theParliament? (para. 6.1)

16.18 Should separate reports on audits of significance be tabled in theParliament? (para. 6.1)

16.19 Should the Auditor-General report to Parliament on efficiency audits thathave been conducted in the event that the Auditor-General is given anefficiency audit function? (para. 6.17)

16.20 In what circumstances should the Auditor-General be required to observeconfidentiality in respect of matters arising out of an audit? Should this bea matter for legislation? (para. 6.23)

16.21 What is the appropriate relationship that should apply between theAuditor-General and Parliamentary committees, including the PublicAccounts Committee, in the conduct of Parliamentary reviews of auditreports and related matters? (para. 6.39)

16.22 Should the Auditor-General be required to obtain auditee comments on aproposed audit report to Parliament? If so, how should such a procedureoperate? (para. 6.44)

16.23 What are the respective responsibilities of auditees, Ministers, centralagencies, Parliamentary committees and the Auditor-General formonitoring and reporting to Parliament on responses to audit findings?(para. 6.52)

16.24 Should departments, statutory bodies and local authorities be required toreport on implementation of audit recommendations in their annualreports? (para. 6.52)

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APPOINTMENT AND TENURE OF THE AUDITOR-GENERAL

16.25 What would be the merits of giving the Queensland Parliament greaterinvolvement in the selection process for the position of Auditor-General? Towhat extent should Parliament be involved and how might the process bearranged? (para. 7.1)

16.26 Are the present tenure provisions for the Queensland Auditor-Generalappropriate? (para. 7.1)

RESOURCING THE AUDITOR-GENERAL'S OFFICE

16.27 Do current resource allocation procedures for the Department of th~Auditor-General detract from the independence required for the externalaudit function? What is the applicability to Queensland of:

(a) resource allocation procedures proposed by the Commonwealth andNew South Wales Public Accounts Committees for the Commonwealthand New South Wales Auditors-General; and

(b) overseas procedures? (para. 8.9)

16.28 Should audit fees be charged for audits conducted by the QueenslandAuditor-General? IT so, what types of government agency should be chargedaudit fees and who should determine the level of audit fees to be charged?(para. 8.18)

16.29 What is the appropriate range and level of skills required for theDepartment of the Auditor-General to undertake its present functionseffectively and are any improvements needed? (para. 8.26) .

16.30 What additional skills would be required to suppOrt an efficiency auditfunction? (para. 8.26)

16.31 Do present recruitment, remuneration and staff development practicesenhance or detract froIll the capacity of the Department of theAuditor-General to recruit and retain staff necessary for the effectiveperformance of the Department's functions? (para. 8.39)

16.32 Should the Department of the Auditor-General be made a statutory officeoutside the Public Service? If so, should the Depaitment also be excludedfrom the jurisdiction of the Public Sector ManageIllent Commission? (para.8.32)

LEGISLATION

16.33 Should the existing Financial Administration and Audit Act 1977 bereplaced by separate financial administration and audit acts? (para. 9.1)

16.34 Should the Local Government Act 1936 be amended to remove theresponsibility of the Auditor-General for recommending budgeting and

. accounting standards for local authorities? If so, who should have thisresponsibility? (para. 9.11)

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Internal Audit

THE NATURE, PURPOSE AND SCOPE OF INTERNAL AUDIT

16.35 Is their a need for uniform standards of internal audit in the Queenslandpublic sector? (para. 10.13)

16.36 What is the applicability of the ITA Standards or other professionalstandards? (para. 10.13)

16.37 Should internal auditing standards be established by statute? (para. 10.13)

16.38 Should a common charter be established that defines the purpose, authorityand responsibility of internal audit organisations in the public sector. Ifsuch a common charter were to be established, who should endorse thischarter and monitor its implementation? (para. 10.17)

16.39 Should internal audit conduct regularity and efficiency audits and programevaluation? (para. 10.21)

16.40 If internal audit is to conduct comprehensive audits, should aspects of thisfunction be prescribed by legislation? (para. 10.21)

16.41 What role should internal audit play in the assessment of the PerformanceEvaluation and Review System established by the QueenslandGovernment? (para. 10.32)

PROFESSIONALISM OF INTERNAL AUDIT

16.42 Are internal audit methodology and quality control measures in theQueensland Public Sector adequate? (para. 11.4)

16.43 . What is or should. be the extent of internal audit involvement in EDPsystems and development? (para. 11.8)

16.44 What skills mix is required by internal auditors in the Queensland publicsector to effectively undertake the designated role of professional internalaudit? (para. 11.12)

16.45 Is there a·need to provide career paths for internal audit staff? (para. 11.12)

16.46 What training, development and recruitment strategies may be required toaddress issues identified in paras 16.42, 16.43 and 16.44? (para. 11.12)

ORGANISATION

16.47 What should be the appropriate organisational and reporting structures toensure the independence of internal audit? (para. 12.3)

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16.48 To what extent can or should internal audit functions be combined withthose of other similar groups? If the internal audit function is combinedwith other functions, what measures should be introduced. to ensure theobjectivity and independence of the audit function? (para. 12.11)

16.49 What is the quality of internal audit services delivered by small units?(para. 12:14)

16.50 What are the options for delivering an effective internal audit service tosmall organisations? (para. 12.14)

16.51 Should a central internal audit unit be created? If so, should it berestricted to a service role or also have a standard setting/monitoring rolefor internal audit activities throughout the Queensland public sector? (para12.18)

16.52 Should any central internal audit unit be an independent body or beresponsible to a central agency? (para. 12.18)

16.53 Should the functions of such a unit be established in legislation? (para.12.18)

16.54 Could internal audit resources be shared between departments andstatutory bodies, perhaps within portfolios? What authority would berequired to enable this? (para. 12.25)

16.55 What are advantages and disadvantages of contracting out internal auditservices? (para. 12.27)

16.56 Should conditions be placed on additional services performed by contractinternal auditors, having regard to the Queensland situation? (para. 12.27)

16.57 What is the "applicability of the audit committee model to:

(a) government owned. enterprises;

(b) statutory bodies;

(c) local authorities; and

(d) state government departments? (para. 12.34)

16.58 Should audit committees be established by legislation or other means?(para. 12.34)

16.59 Should audit committees include members external to the organisation?(para. 12.34)

16.60 What should be the desired relationship of audit committees to Treasuryand the Auditor-General and, in the case of local authorities, theDepartment of Housing and Local Government? (para. 12.34)

96

IRREGULARITY AND FRAUD DETECTION

16.61 What is the role of internal auditors in fraud detection? (para. 13.2)

16.62 What are the respective responsibilities of internal auditors, externalauditors and criminal justice agencies in conducting fraud investigations inthe public sector? (para. 13.9)

16.63 What would be the applicability of an Inspector General model of fraudinvestigation and audit to the Queensland public sector? (para. 13.14)

16.64 What are the appropriate techniques, skills and experience for staffinvolved in the prevention, detection and investigation of fraud in theQueensland public sector. Are guidelines required, if so who should developthese? (para. 13.1)

RELATIONSHIP WITH THE AUDITOR-GENERAL

16.65 What is the scope for maximising audit coverage, including sharing of theaudit task, between the external and internal auditors? (para. 14.1)

16.66 To what extent should the Auditor-General disclose to internal auditors thedetails of the scope and testing planned for external audits? (para 14.1)

97

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