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Western Australian Auditor General’s Report

Audit Results ReportAnnual 2012-13 Assurance Audits

Report 15 – November 2013

Office of the Auditor General Western Australia

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VISION of the Office of the Auditor GeneralExcellence in auditing for the benefit of Western Australians

MISSION of the Office of the Auditor GeneralTo improve public sector performance and accountability by reporting independently to Parliament

ISSN: 2200–1913

WESTERN AUSTRALIAN AUDITOR GENERAL’S REPORT

Audit Results ReportAnnual 2012-13 Assurance Audits

Report 15November 2013

2 | Auditor General Western Australia | Audit Results Report – Annual 2012-13 Assurance Audits

THE PRESIDENT THE SPEAKERLEGISLATIVE COUNCIL LEGISLATIVE ASSEMBLY

AUDIT RESULTS REPORT – ANNUAL 2012-13 ASSURANCE AUDITS

This report under section 24 of the Auditor General Act 2006 (AG Act) covers 2012-13 assurance audit activity to 31 October 2013 and includes:

y opinions and results of audits on the controls, financial statements and key performance indicators (KPIs) of departments, statutory authorities and subsidiary bodies with reporting dates primarily on 30 June 2013

y opinions and results of audits of corporatised bodies reporting under their enabling legislation and other entities audited as requested by the Treasurer

y audit certifications of financial and statistical information produced by agencies to discharge conditions of Commonwealth funding, grants, Royalties for Regions funding agreements and other legislation

y issues identified during the 2012-13 audits which are significant enough to bring to the attention of the Parliament relating to:

the Annual Report on State Finances

operations of individual agencies.

COLIN MURPHYAUDITOR GENERAL13 November 2013

Auditor General Western Australia | Audit Results Report – Annual 2012-13 Assurance Audits | 3

Contents

Auditor General’s Overview 4Executive Summary 5

Key Findings 5Recommendations 7

2012-13 Audit Opinions 8Introduction 8Summary of Audit Opinions 8Other Audit Services 9Qualified Opinions Issued 9Matters of Significance Reported with Audit Opinions 12Qualified Opinions from the Prior Year Removed in 2012-13 132012-13 Audits Not Undertaken 14

Management Issues 15Control Environment 15Financial and Management Controls 16Information Systems (IS) Controls 20Key Performance Indicators (KPIs) 21

Quality and Timeliness of Financial Reporting 23Quality 23Timeliness 24Best Practice Agencies 25

Other Financial Reporting and Audit Issues 27Annual Report on State Finances 27Timeliness 28Western Australia’s Finances – Selected Key Indicators 29Shared Services Decommissioning 32Statements of Corporate Intent 33Restructure of Agencies 35

Key Financial Reporting Issues at Individual Agencies 37Key Financial Reporting Issues Addressed During the Audits 37Selected Significant Key Financial Transactions, Results and Ratios 40Key Financial Ratios 43

Appendix 1: Summary of Audit Opinions 47Key to Table of Audit Opinions 47

Appendix 2: Audit Certifications 55Royalties for Regions Certifications 57

Appendix 3: Liquidity/Current Ratios for Government Agencies 66Appendix 4: Borrowings to Assets Ratios for Government Agencies 70Glossary 71Alphabetical Index 72


Auditor General’s Overview

This report summarises the results of the annual audits of agencies, for the year-ending 30 June 2013.

This year nine agencies received qualified audit opinions, a slight increase on the previous year. There was also an increase in the number of financial control weaknesses reported to management for corrective action, with 428 issues being reported across 152 agencies.

I was pleased to note continued improvement in the timeliness with which agencies were submitting their financial statements for audit with 40 per cent submitting earlier than last year. However, we also found more errors in the financial statements. Often the errors were significant and too often they related to non-complex matters. Agencies need to be both timely and reliable in their financial reporting.

This year we have expanded our reporting of important issues, transactions and trends identified during our audits of individual agencies and from our audit of the Annual Report on State Finances. Some of this information may already have been reported in individual annual reports. However, we hope that Parliament will find the inclusion of the information in a single report is both convenient and helpful to its monitoring of the public sector.


Executive Summary

This report contains the results of annual assurance audits of agencies with a 30 June or 31 July 2013 reporting date.

Key FindingsAudit Opinions y 152 audit opinions were issued by 31 October 2013 relating to the 2012-13 financial

year. 203 certifications were also issued. (Page 8)

y Nine agencies received qualified opinions:

Metropolitan Public Hospitals’ financial statements and controls were qualified as procedures over medical practitioners’ treatment charges for private and overseas patients were inadequate to ensure that all revenue from that source had been brought to account. In addition, the KPIs were qualified because of errors in the recording of emergency waiting time data and because of inadequate system access controls whereby unauthorised changes could potentially be made to waiting time data used for this KPI.

The KPIs of WA Country Health Service were qualified because of errors in the recording of emergency waiting time data.

Legal Contribution Trust received a qualified opinion on their financial statements, controls and KPIs because sufficient audit evidence could not be obtained as to the total amount of interest receivable on solicitors’ trust bank accounts and interest earned on legal practitioners’ trust money.

Department for Communities received a qualified opinion on their financial statements, controls and KPIs as sufficient audit evidence could not be provided about the eligibility of Seniors Card holders for rebates.

Department of Fisheries received a qualified opinion on controls as restricted funds, including specific purpose grants money, were used to meet operational needs.

Racing and Wagering Western Australia received a qualified opinion on their financial statements as they did not report Royalties for Regions funding as income.

The Commissioner of Main Roads received a qualified opinion on KPIs as actual results were not reported for three of the KPIs approved by the Under Treasurer for 2012-13.

Keep Australia Beautiful Council (W.A.) and the Local Health Authorities Analytical Committee received qualified opinions on their KPIs as the Under Treasurer’s approval had not been obtained for changes made to their KPIs. (Commencing Page 9)


Executive Summary

y We reported Matters of Significance with the audit opinions of three agencies to highlight the following:

Metropolitan Public Hospitals and the WA Country Health Service received approval from the Under Treasurer to not report audited KPIs for elective surgery waiting times as a new definition to be used nationally is being finalised. The approval was conditional on unaudited elective surgery waiting times information being included in their annual reports.

The transactions and balances of the Western Australian Agriculture Authority were included in the financial statements of the Department of Agriculture and Food but have not been separately disclosed. (Page 12)

Management Issues y 428 financial and management control weaknesses were identified in 2012-13, up

from 360 last year. Twenty-two per cent were unresolved from the previous year. (Page 16)

y 282 information system control weaknesses were identified. The majority are simple to fix but if not resolved will leave agencies vulnerable to security incidents and disruptions to systems. (Page 20)

y KPI shortcomings reported to agencies fell slightly to 56 weaknesses compared to 59 last year. Twenty-three per cent were unresolved from the previous year. (Page 21)

Quality and Timeliness of Financial Reporting y 54 per cent of agencies, the same as the previous year, demonstrated efficiency in

their year-end processes by being audit ready within 20 days of year-end, with some of those agencies being ready slightly earlier than last year. (Page 24)

y The top 40 ‘Best Practice’ agencies across two categories are acknowledged for timeliness in their financial reporting, good financial controls and reporting practices. (Page 25)

Other Financial Reporting and Audit Issues y The Annual Report on State Finances (ARSF) was tabled on 25 September. The

ARSF reports on the State’s annual financial operations and financial position at year-end and explains significant variations from the prior year and from the annual budget estimates. In this report we have supplemented the information contained within the ARSF with other information that some readers might find useful. (Page 27)


y Tabling of annual Statements of Corporate Intent (SCI) after the commencement of the financial year to which they relate continues. Although the postponement of the State Budget affected the completion of SCIs, it is of concern that no approved 2013-14 SCIs were tabled at 30 September 2013. Eleven were tabled by 31 October 2013. SCIs are required from agencies that operate at arm’s length from government. They contain details of the annual contractual agreement between the agency and the government and are intended to be tabled in Parliament by the relevant Minister either before commencement of or early in the financial year to which they relate. (Page 33)

Key Financial Reporting Issues at Individual Agencies y A number of changes in accounting treatment occurred during the year that

significantly impacted on agency financial results. We also noted some important financial transactions that occurred across the public sector. (Page 37)

Recommendations1. Agencies should continuously maintain the integrity of their financial control

environment and accuracy of financial reporting. This should include:

y periodic review and updating of all financial, asset, human resources and other policies by management and communicating these policies to staff

y ensuring that there is ongoing review and improvement of internal control systems

y promptly addressing control weaknesses brought to their attention by our audits.

2. All agencies should review their KPIs on a periodic basis to ensure that they remain relevant, appropriate and fairly present performance against realistic targets.

3. Statements of Corporate Intent should be tabled within timeframes required by the relevant legislation and in any event by the start of the financial year to which they relate.

4. The Department of Treasury should finalise its review of the SCI process in time for new procedures to be implemented for the 2014-15 SCIs.

Executive Summary


y 152 audit opinions were issued by 31 October 2013 relating to the 2012-13 financial year. 203 certifications were also issued.

y Nine agencies received qualified opinions and Matters of Significance were included in the opinions of three agencies.

IntroductionThe Financial Management Act 2006 (FM Act) governs financial accountability of most agencies while the Auditor General Act 2006 (AG Act) governs the activities and role of the Auditor General.

The Auditor General is required to issue an opinion to the responsible Minister for each agency audited. The opinion will relate to the financial statements and, depending on each agency’s enabling legislation, may also relate to controls and key performance indicators (KPIs):

y Financial statements – assurance that the financial statements and supporting notes are materially complete, accurate, reliable and comply with relevant legislation and applicable accounting standards

y Controls – assurance that the internal control systems and procedures, both manual and computerised, are adequate and ensure that financial transactions comply with legislative requirements

y KPIs – assurance that the KPIs are relevant, appropriate, based on reliable data and fairly present the performance of the agency in achieving its desired outcomes.

It should be noted that the audit opinions relate to historical information reported in the financial statements and KPIs and are not predictive of future expectations.

Summary of Audit OpinionsAt 31 October 2013, 152 audit opinions had been issued, primarily for agencies with financial periods ending on 30 June 2013. Appendix 1, commencing on page 47, provides a listing of all audit opinions issued since 6 May 2013.

2012-13 Audit Opinions


Audit Opinion issued on Type of agency NumberFinancial statements, controls and key performance indicators

Departments 43Statutory authorities 86

Financial statements only Annual Report on State Finances 1Corporatised entities 15Subsidiary entities 6Request audits (under s19 of AG Act) 1

TOTAL NUMBER OF AUDIT OPINIONS ISSUED 152

Table 1: Number and type of audit opinions issued between 6 May 2013 and 31 October 2013

Other Audit ServicesIn addition to opinions, 203 certifications were also issued. Appendix 2 details the 23 audit certifications of financial and statistical information produced by agencies to discharge reporting obligations for Commonwealth funding, grants or other legislation and 180 Royalties for Regions program certifications issued up to 31 October 2013. (Refer to page 55.)

An agreed upon procedures engagement for the regulatory financial statements of the Electricity Networks Corporation (Western Power) for the year-ending 30 June 2013 was completed on 5 September 2013. This report was prepared for submission to the Economic Regulation Authority.

Qualified Opinions IssuedNine agencies received qualified opinions:

y The Minister for Health in his capacity as the Deemed Board of the Metropolitan Public Hospitals

y WA Country Health Service

y Legal Contribution Trust

y Department for Communities

y Department of Fisheries

y Racing and Wagering Western Australia

y Commissioner of Main Roads

y Keep Australia Beautiful Council (W.A.)

y Local Health Authorities Analytical Committee.



The full opinion appears in the annual report of each agency but details of each qualification are given below.

The Minister for Health in his capacity as the Deemed Board of the Metropolitan Public Hospitals – Qualified opinion on financial statements, controls and KPIsThe controls over medical practitioners’ treatment charges remained deficient as there were inadequate procedures in place during 2012-13 to ensure that all revenue from medical practitioners’ treatment of private and overseas patients was brought to account. Each hospital department is responsible for generating its own medical practitioner private patient billing information and for providing that information to the Health Corporate Network so that private patients can be invoiced. However, owing to inadequate controls, many invoices were not raised for medical practitioners’ treatment charges.

A similar qualification has been issued each year since 2009-10. Although WA Health has advised that it is taking action to improve its system for recording private patient billing information and also to recover outstanding accounts, during 2012-13 the controls were not adequate at all hospitals to ensure that all revenue was collected or brought to account.

Controls over the recording of emergency waiting time data used for the effectiveness KPI “Percentage of emergency department patients seen within recommended times” were inadequate. Audit tests of samples of attendance and treatment times identified a significant number of differences between the database and source records. In addition, because of inadequate system access controls, unauthorised changes could potentially be made to waiting time data without detection. It is recognised that the EDIS system is first and foremost a medical system and not necessarily designed for reporting of performance in relation to waiting times. However because of the errors in waiting time data and the associated control weaknesses an opinion could not be formed on whether the indicator was fairly presented. The same qualified opinion was issued for 2011-12.

WA Country Health Service – Qualified opinion on KPIsControls over the initial recording of waiting time data used for the effectiveness indicator “Percentage of emergency service patients seen within recommended times (major rural hospitals)” were inadequate. Audit tests of a sample of attendance and treatment times identified a significant number of differences between source records and the database records used for reporting the KPI. Consequently an opinion could not be formed on whether the indicator was fairly presented. The same qualified opinion was issued for 2010-11 and 2011-12.



Legal Contribution Trust – Qualified opinion on financial statements, controls and KPIsThe Legal Contribution Trust again received a qualified audit opinion on its financial statements, controls and KPIs. Sufficient audit evidence could not be obtained as to the total amount of interest receivable on solicitors’ trust bank accounts and interest earned on legal practitioners’ trust money for the six months ending 30 June 2013. Consequently the Trust’s efficiency KPI could also not be verified.

The Trust is entitled to receive 51 per cent of all interest earned on solicitors’ trust bank accounts held with financial institutions in the State of Western Australia. In certain instances the financial institutions did not remit the correct amount of interest on some solicitors’ trust accounts to the Legal Contribution Trust. Management is taking steps to recover outstanding interest revenue.

Department for Communities – Qualified opinion on financial statements, controls and KPIsThe Department’s controls over payments to seniors for the Cost of Living Rebate and the Safety and Security Rebate were inadequate. The Department did not have adequate controls in place to confirm the ongoing eligibility of seniors on its database to the Seniors Card. In particular, Seniors Card application forms that were processed prior to June 2004 were destroyed meaning that Audit was unable to obtain sufficient audit evidence about the eligibility of many rebate recipients. Audit was therefore unable to determine whether Grants and Subsidies expenditure in the financial statements and the number of Seniors Card holders in the KPI “Average Cost to Administer a Seniors Card” were fairly presented. The same qualified opinion was issued for 2010-11 and 2011-12.

The Department has been developing a new system to manage the Seniors Card and rebates and has taken steps to verify the eligibility of past applicants, but had not finalised these steps during 2012-13.

Racing and Wagering Western Australia – Qualified opinion on financial statementsFor the year-ended 31 July 2013, Racing and Wagering Western Australia reported Royalties for Regions funding of $1.2 million as Payables instead of recognising the funding as income in the Statement of Comprehensive Income, in accordance with the requirements of Australian Accounting Standard AASB 1004 “Contributions”. Accordingly, Payables were overstated by $1.015 million, and Profit for the period was understated by the same amount. Grant Income was understated by $1.2 million and Grant expenses were also understated by $185 000.



Department of Fisheries – Qualified opinion on controlsDuring the 2012-13 financial year the Department drew on $176 000 of restricted funds to meet operational needs. Controls over these restricted funds, which included specific purpose grant money, were inadequate for ensuring that they were spent only for their approved purpose.

Commissioner of Main Roads – Qualified opinion on KPIsThe Commissioner for Main Roads did not report actual results for 2012-13 for effectiveness KPIs on the availability of traffic lights, road lighting and emergency phones. Management did not obtain the Under Treasurer’s approval to omit these indicators. Expiry of the Traffic Control Infrastructure Contract and transition to a new delivery arrangement during 2012-13 impacted on the reliability of data and as a consequence the Commissioner elected not to report the results.

Keep Australia Beautiful Council (W.A.) – Qualified opinion on KPIsThe Council amended its efficiency indicators during 2012-13 but has not obtained Under Treasurer approval for the changes as required by Treasurer’s Instruction 904. Additional revisions of the KPIs are proposed and the Council has indicated that the necessary approval will be sought during 2013-14.

Local Health Authorities Analytical Committee – Qualified opinion on KPIsThe Committee reported two key efficiency indicators for 2012-13 to demonstrate efficiency in the analysis of food and food products. One of the indicators has not been approved by the Under Treasurer as required by Treasurer’s Instruction 904.

Matters of Significance Reported with Audit Opinions Where a matter in relation to the financial statements or KPIs is of concern but does not warrant a qualified audit opinion, a Matter of Significance paragraph may be included with the audit opinion. In most instances the purpose is to highlight a significant matter that is not disclosed or is not apparent in the financial statements or KPIs.



Agency Details of Matter of SignificanceDepartment of Agriculture and Food

The Biosecurity and Agriculture Management Act 2007 (BAM Act) requires the Western Australian Agriculture Authority’s (WAAA) activities to be regarded as services under the control of the Department. Consequently the Department has included WAAA’s income, expenses, assets and liabilities in its financial statements. This has been highlighted in the audit opinion so that readers are aware of this arrangement and that the Department’s financial statements do not separately identify WAAA’s transactions.

WA Country Health Service and The Minister for Health in his capacity as the Deemed Board of the Metropolitan Public Hospitals

For 2012-13 the Metropolitan Public Hospitals and the WA Country Health Service have again not reported on their KPI for “Elective Surgery Waiting Times” as the definition of national elective surgery waiting times had not been finalised for the year-ended 30 June 2013.Last year both agencies received approval from the Under Treasurer to remove the “Elective Surgery Waiting Times” KPI from their audited KPIs. The approval was conditional on the inclusion of unaudited performance information measuring elective surgery waiting times in their annual reports. The elective surgery waiting times are to be reinstated as an audited KPI following the successful definition of national elective surgery waiting time indicators.

Table 2: Matters of Significance comments included with audit opinions

Qualified Opinions from the Prior Year Removed in 2012-13The following qualifications were removed:

y Department for Child Protection and Family Support – opinion on controls

The former Department for Child Protection introduced procedures for the review of financial assistance, case support costs and foster care subsidy payments. Initially this review was conducted by a checking officer and from October 2012, by Internal Audit. Our review of this work gave reasonable assurance that sufficient evidence is recorded to support the identity and validity of the Department’s financial hardship assistance payments for 2012-13.

y Housing Authority – opinion on controls

In 2011-12 the Authority’s controls over payments to maintenance contractors were not adequate to provide assurance that job maintenance orders had been satisfactorily performed before approving payment. Although the Authority implemented a sample



based inspection regime during that year, sufficient samples of jobs based on risk and value were not inspected before payment.

Our audit for 2012-13 confirmed that the Authority’s policies and procedures for the physical verification of job orders before payment have been reviewed. All maintenance payments over a set limit as well as various categories of maintenance are required to be physically sighted before payment, irrespective of value. This current inspection regime means that a significant percentage of job orders are physically verified before payments are made to the head contractors. As these controls operated during the 2012-13 year, the qualification has been removed.

y Queen Elizabeth II Medical Centre Trust – opinion on KPIs

The Trust conducted a customer satisfaction survey for the year-ended 30 June 2013 and reported the results in their KPIs. The previous qualification of the Trust’s KPIs has therefore been removed.

2012-13 Audits Not UndertakenFour agencies have not been audited for the 2012-13 financial year.

These audits were dispensed with under section 14 of the AG Act because their operations have ceased or there was insufficient activity to justify an audit being undertaken. The decision to dispense with the audits was finalised after consultation with the Treasurer.

Agency Reason Why Audits Were Not Undertaken1. Department of Housing The Department did not operate during the year. 2. Landcare Trust The Trust has ceased to operate and does not hold any funds.

Legislation to repeal Part VA of the Soil and Land Conservation Act 1945, which created the Trust, is required.

3. State Supply Commission

The Commission’s functions were transferred in June 2009 and its records are now kept by the Department of Finance. The State Supply Commission Act 1991 has not yet been repealed.

4. Western Australian Building Management Authority

The Authority has ceased to operate and is awaiting repeal of its legislation, Part IA of the Public Works Act 1902. Its records are held by the Department of Finance.

Table 3: Audits dispensed with under section 14 of the AG Act Note: Until repeal of their enabling legislation, the three statutory authorities remain on Schedule 1 of the FM Act.

A final audit of these agencies will be performed as and when they are abolished. However, if they are not abolished by 2014-15, then an audit will be required in that year despite the dormant state of the agencies.



y 428 financial and management control weaknesses were identified in 2012-13, up from 360 last year. Twenty-two per cent were unresolved from the previous year.

y 282 information system control weaknesses were identified. The majority are simple to fix but if not resolved they will leave agencies vulnerable to security incidents and disruptions to systems.

y KPI shortcomings reported to agencies fell slightly to 56 weaknesses compared to 59 last year. Twenty-three per cent were unresolved from the previous year.

Control EnvironmentResponsibility for developing and maintaining adequate systems of internal control rests with agency management. These control systems reduce the risk of error and fraud and provide assurance to management and auditors that management reports and financial statements are materially correct. Maintaining adequate internal control ensures:

y financial information and other records, including data for key performance indicators, are accurately maintained

y assets are appropriately safeguarded

y errors and other irregularities are prevented or detected

y compliance with legislation and policy guidelines

y internal and external reporting is reliable and timely.

The AG Act requires the Auditor General to audit agency accounts and, for agencies under the FM Act, to form an opinion on controls. This involves an assessment of the design of the controls and whether they have been properly implemented, and testing to see that they are working reliably. Details of our control findings are included in management letters to the Accountable Authority. Control weaknesses are ranked as either:

y Significant – potentially presents a significant risk to the agency if not addressed promptly. Such control weaknesses may lead to a qualified opinion, especially if carried forward from the prior reporting period

y Moderate – of sufficient concern to warrant action being taken as soon as practicable

y Minor – not of primary concern but still warrants action being taken.

Agency management is given the opportunity to review the audit findings and provide comments prior to completion of the audit. Often policies, procedures or practices are improved by management after we raise them and before the audit is completed. However, where weaknesses remain outstanding, agency responses or any action being

Management Issues


undertaken is noted. Where weaknesses recur in following years, these are separately reported to agency management and, if significant, are considered as a basis for a qualified opinion. At the completion of each audit a copy of our management letter is sent to the responsible Minister along with the audit opinion.

While management letters relate specifically to an individual agency, the weaknesses are often common to other government agencies. The following is a summary of control weaknesses identified during 2012-13 under three headings:

y financial and management controls

y information system controls

y key performance indicators.

Agencies are encouraged to consider and identify control improvements discussed in this part of the report that may be relevant to their operations.

Financial and Management ControlsDuring 2012-13, 78 agencies were advised of control weaknesses that need to be addressed. These deficiencies were also brought to the attention of the responsible Ministers at the conclusion of our audits.

In total, 428 control weaknesses were identified. This was higher than in previous years, although there is an increased concentration on moderate issues that warrant action as soon as practicable. (Refer to Chart 1 overleaf.)

It is disappointing to note that 96 control weaknesses (22 per cent) at 25 agencies were unresolved from the prior year. The challenge for agencies is to rectify their control weaknesses as soon as possible.

Management Issues


2009-10 2010-11 2011-12 2012-13

100

80

60

40

20

0

Minor

Moderate

Significant

70

230

66

56

229

125

58

234

68

50

291

87

366 410 360 428 Totals per year

Per

cent

age

Chart 1: Breakdown of the ratings of the financial and management control weaknesses reported to agencies

A breakdown of the types of control weaknesses identified in 2012-13 and the two preceding years is shown in Chart 2. Weaknesses in revenue controls were the only category showing a reducing trend.

22%

14%4%

14%

5%

15%

14% 12%

18%

18%

2%

16%

4%

15%

14%13% 14%

22%

11%

2%

16%

4%

21%

10%

Assets

Legislative compliance

Expenditure

Liabilities

Financial reporting

Payroll and human resources

Inventory

Revenue

2011 – 410 issues 2012 – 360 issues 2013 – 428 issues

Chart 2: Financial and management control weaknesses by category for the last three yearsIn 2012-13 a greater proportion of control weaknesses related to payroll and human resources and expenditure.

Management Issues


Examples of the control weaknesses identified across agencies in these areas were:

Payroll and Human ResourcesThirty-seven agencies received recommendations to improve on 90 payroll and human resource control weaknesses. Twenty-two weaknesses were unresolved from the prior year, and ten were rated as significant. As payroll forms a major part of most agencies’ cost of operation, it is essential that human resource management and payroll controls are effective. Controls to reduce the following types of weaknesses are needed:

y Payroll cost centre reports at 13 agencies were not signed off promptly by cost centre managers nor returned prior to dispatch of payroll. This was a significant issue at six of these agencies, requiring immediate action to implement this control.

Although cost centre managers are not expected to identify every detailed error in the payroll, these managers are best placed to identify any significant errors. These may include overpayments to staff who are on leave without pay, have recently ceased acting on higher pay or are no longer employed.

y Commencement and termination procedures not communicated promptly or not adequately documented and retained on file.

Documentation of all appointments and terminations needs to be prepared, signed by the appropriate parties and retained on file. Use of termination checklists and review of termination pay calculations should be routinely actioned to ensure that outgoing employees are not overpaid and all agency property, attractive assets and purchasing cards are returned.

y Records of employees’ annual and long service leave not accurate as well as negative leave balances, leave approved after being taken and leave accruing while on leave without pay.

Employee leave needs to be approved, recorded in their time records and personal records to ensure that the terms and conditions of their employment are administered correctly.

y Payroll reconciliation procedures at seven agencies were not appropriately completed in accordance with good practice. Reconciliations to time records or the general ledger were either not performed in a timely manner or were not evidenced or signed by preparer and reviewer, increasing the risk of fraud and error.

y Fifteen agencies had staff with excessive leave balances accrued. This has the adverse impact of excessive financial liabilities and also can indicate over-reliance on key individuals. This over-reliance can result in business interruption when the employee leaves the agency. Failure to take leave can also mask fraud.

Management Issues


ExpenditureNinety-five expenditure control weaknesses were reported to 39 agencies in 2012-13. Thirteen were rated as significant and 18 were prior year issues not resolved.

y Purchasing (credit) card control weaknesses included evidence of transactions to support payments not submitted in a timely manner or submitted without the approval of the manager or supervisor. There were instances where cards were used for other than business purposes. Our office is currently performing an across government benchmarking audit of purchasing card controls, expected to be tabled in the second quarter of 2014.

y Officers incurring or certifying expenses beyond their approved limits or approving expenditure when they were not authorised to do so.

y Payment processing requires greater segregation of duties in at least six agencies as currently staff are completing procedures without sufficient review to reduce the risk of errors or fraud.

Legislative ComplianceSixty-six legal compliance issues were reported to 41 agencies. Six were rated as significant and 18 were prior year issues. These included:

y Five agencies tabled, published or displayed on their website 2011-12 financial statements or KPIs that were not the final audited version.

y Outdated policies and procedures in various aspects of agency operations including strategic planning, risk management and internal audit. In some instances plans or registers either did not exist or were not up to date. As a consequence, management or staff may not be fully conversant with future direction, business risks or challenges their agency may face.

y Financial management manuals were not up to date or did not reflect current policies and procedures. Consistent administration of policies and procedures ensures an agency’s operations and financial management practices are routinely and continuously applied by all staff including new and temporary staff.

Recommendation:Agencies should continuously maintain the integrity of their financial control environment and accuracy of financial reporting. This should include:

y Periodic review and updating of all financial, asset, human resources and other policies by management and communicating these policies to staff

Management Issues


y Ensuring that there is ongoing review and improvement of internal control systems

y Promptly addressing control weaknesses brought to their attention by our audits.

Information Systems (IS) Controls Information systems underpin most aspects of agency and government operations and services. It is therefore vital that agencies implement appropriate controls to maintain reliable, secure and resilient information systems.

Audits of general computer controls are a major part of the information systems work we undertake. Well implemented general computer controls ensure reliable and secure processing of financial and key performance information. We focus our computer audit capacity on those agencies with significant computer environments to determine whether their controls are appropriately designed and operating effectively.

In 2012-13, 282 weaknesses were identified which was the same as last year’s total. Fifty-eight per cent of the issues were rated as moderate requiring action as soon as practicable and 41 per cent rated as minor. There was only one significant finding reported.

Chart 3 shows the percentage of findings for each category. Most of the weaknesses we identified related to IT Operations (44 per cent) and security (32 per cent) and while they are relatively simple to fix, if not resolved they leave agencies potentially vulnerable to significant disruption and costs. This year we saw a big reduction of findings in the areas of change management and physical security.

IT operations

Risk management

Information security

Business continuity

Change management

Physical security

44%

5%

32%

1%

14%

4%

Chart 3: IS control issues by category for 2012-13

A more detailed report on the results of our information system audits is planned for early 2014. The report will consolidate the results of audits of agencies with a 30 June 2013 reporting date as well as upcoming work on agencies with a 31 December 2013 reporting date.

Management Issues


Key Performance Indicators (KPIs)As reported on page 10, seven of the nine agencies received qualified opinions on their KPIs. In total 25 agencies were advised of a total of 56 areas where KPIs should be improved. (Refer to Table 4.)

Comparative Data on KPIs 2010-11 2011-12 2012-13Number of agencies with reported KPI weaknesses 26 22 25Number of KPI weaknesses reported 79 59 56Significant KPI weaknesses reported 29 29 20Number of agencies with qualified KPI opinions 5 5 7

Table 4: Summary of KPI weaknesses reported to agenciesThere was a small reduction in the number of KPI weaknesses reported to agencies compared to last year. However, the number of agencies with qualified opinions increased.

Data collection and integrity remains the most commonly identified KPI control area needing improvement. The need to more clearly define agency desired outcomes is also an increasing trend over the three years. (Refer to Chart 4.)

Data

Surveys

Definitions

Targets

No measure

Sampling

Outcomes

Other

40%

4%10%

11%

4%

18%

5%8%

48%

5%

15%2%

10%

3%

15%

36%

3%7%18%

7%

11%

7%

11%

2011 – 79 issues 2012 – 59 issues 2013 – 56 issues

2%

Chart 4: Weaknesses relating to KPIs for last three yearsThe main KPI weaknesses reported to management related to data collection and integrity.

Management Issues


Twenty control weaknesses relating to data collection and integrity were reported to 13 agencies. Eight were rated as significant. These included:

y data being incorrectly recorded

y data not accurate or not easily verifiable (especially if collected by third parties)

y insufficient data collected

y data not collected for the full period of review

y data not secured to prevent amendment after being entered.

The information needs of KPI users continually evolve as changes occur over time to an agency’s mandate, priorities, service delivery methods or information availability. There is a risk that if not periodically reviewed, KPIs may not continue to meet user expectations in terms of relevance.

We made seven recommendations to agencies that they review their KPIs and agency desired outcome statements. Two of these agencies were Metropolitan Public Hospitals and the WA Country Health Service. The KPIs of these agencies require review to ensure their ongoing relevance to users. Further, the agencies have very extensive suites of KPIs that are time consuming and costly to prepare to a standard that meets audit requirements.

We have recommended that WA Health ensure that, as intended by Treasurer’s Instruction 904, only key performance indicators are included in the audited KPIs and that consideration be given to reporting other non-key performance indicators as unaudited indicators in the agencies’ annual reports. In 2011-12 WA Health initiated a review of the health sector KPIs, with assistance from an external consultant engaged in 2012-13. We recommend that the review of KPIs be completed as a priority.

RecommendationAll agencies should review their KPIs on a periodic basis to ensure that they remain relevant, appropriate and fairly present performance against realistic targets.

Management Issues


y 54 per cent of agencies, the same as the previous year, demonstrated efficiency in their year-end processes by being audit ready within 20 days of year-end, with some of those agencies being ready slightly earlier than last year.

y A disappointingly large number of agencies prepared financial statements that had numerous errors. This increased costs and delayed completion of the audits.

y The top 40 ‘Best Practice’ agencies across two categories are acknowledged for timeliness in their financial reporting, good financial controls and reporting practices.

QualityThe quality of agency financial statements, KPIs and supporting working papers provided for audit has a direct bearing on the timeliness and cost of the audit. This year most agencies submitted financial statements, KPIs and working papers for audit that were of a good or satisfactory quality. However a disappointingly large number of agencies submitted financial statements that contained numerous errors. This added cost to the audit and delayed the completion of the audit.

Various best practice initiatives can be implemented by agencies to improve the quality of their financial reporting. To generate reliable financial reports, initiatives should be undertaken throughout each financial year and after year-end.

At the beginning of the financial year, as part of the budgeting process, management should confirm the accounting policies to be applied for the ensuing year.

Before year-end, agencies need to:

y Prepare a project plan of human and financial resources, assign responsibilities for tasks and set time frames for financial reporting

y Identify and review changes to accounting standards and reporting requirements and confirm the approach to any changes with Audit

y Determine the form and content of their KPIs and obtain necessary approvals from Treasury

y Prepare pro-forma financial reports, including all comparative information that can be reviewed by Audit well in advance of the final audit visit.

After year-end:

y Analyse variations between actual and budget as well as previous year results to identify and correct omissions and/or errors

Quality and Timeliness of Financial Reporting


y Ensure managers with sign off responsibility for components of the financial report do so as per the established timetable

y Ensure the draft financial report has received an internal quality assurance review, preferably by internal audit or other suitably qualified professionals.

Timeliness Over half the agencies were “Audit Ready” within 20 days of their financial year-end.

Being ready for audit as soon as possible after year-end enables agencies to release resources for other important financial management tasks, thereby improving the overall efficiency and financial management of the public sector.

The date when each agency was “Audit Ready” is reported in Appendix 1 (commencing on page 47) while Chart 5 below summarises the improvement over the last five years. Using the three bands over the period shows a similar result for this year compared to last year, although within the bands agencies have improved with 40 per cent of agencies submitting earlier for 2013.

More than 38 days

after year-end

Between 20-38

days of year-end

Within 20 days of

year-end

100

80

60

40

20

02008-09 2009-10 2010-11 2011-12 2012-13

17

60

23

32

46

22

49

40

11

54

35

11

54

36

10

Per

cent

age

Chart 5: Percentage of agencies “Audit Ready” within three time brackets for the past 5 years




Best Practice AgenciesIn 2003 we commenced rating agencies on their financial reporting and financial controls. A growing list of agencies achieving better practice was reported to Parliament each year, from 16 in 2003 to 82 in 2011, meaning 54 per cent of June reporting agencies achieved better practice status.

Last year we introduced the concept of “best practice” and recognised only the top 20 large and top 20 small agencies. Again this year we recognise the top 20 large agencies (Table 5) and top 20 small agencies (Table 6) and congratulate agencies rated as top achievers again this year. Our assessment criteria include:

y clear opinion on financial statements, controls and key performance indicators

y audit ready early, ideally no later than 20 days after financial year-end

y good quality financial statements and key performance indicators, supported by reliable working papers and submitted for audit within the agreed timeframe

y management resolution of accounting standards and presentation issues

y key staff available during the audit process

y assessment of the number and significance of control weaknesses raised in management letters.

Best Practice Top 20 Large AgenciesDepartment of Aboriginal Affairs

Department of Finance

Department of Sport and Recreation

Department of the Attorney General

Department of Treasury

Electricity Networks Corporation – Western Power

Electricity Retail Corporation – Synergy

Esperance Port Authority

Fremantle Port Authority

Geraldton Port Authority

Gold Corporation

Government Employees Superannuation Board

Insurance Commission of Western Australia

Legal Aid Commission of Western Australia

Lotteries Commission

Water Corporation

Western Australian Alcohol and Drug Authority

Western Australian Land Authority

Western Australian Sports Centre Trust

Western Australian Treasury Corporation

Table 5: Top 20 best practice large agencies for 2012-13



Best Practice Top 20 Small AgenciesAlbany Port Authority

Botanic Gardens and Parks Authority

Broome Port Authority

Building and Construction Industry Training Board

Bunbury Port Authority

Chemistry Centre (WA)

Department of State Development

Department of the Registrar, Western Australian Industrial Relations Commission

Economic Regulation Authority

Heritage Council of Western Australia

Law Reform Commission of Western Australia

Library Board of Western Australia

Office of the Information Commissioner

Parliamentary Commissioner for Administrative Investigations

Parliamentary Inspector of the Corruption and Crime Commission

School Curriculum and Standards Authority

Swan River Trust

Western Australian Health Promotion Foundation

Workcover Western Australia Authority

Zoological Parks Authority

Table 6: Top 20 best practice small agencies for 2012-13


y The Annual Report on State Finances (ARSF) was tabled on 25 September. The ARSF reports on the State’s annual financial operations and financial position at year-end and explains significant variations from the prior year and from the annual budget estimates. In this report we have supplemented and highlighted aspects of the ARSF to provide Parliament with additional information about the State’s finances.

y Tabling of annual Statements of Corporate Intent (SCI) after the commencement of the financial year to which they relate continues. Although the postponement of the State Budget affected the completion of SCIs, it is of concern that no approved 2013-14 SCIs were tabled at 30 September 2013. Eleven were tabled by 31 October 2013.

This part of the report details issues of current significance and legislative compliance:

y Annual Report on State Finances

y Shared services decommissioning

y Statements of Corporate Intent

y Restructuring of agencies.

Annual Report on State FinancesThe financial statements of the Government of Western Australia are prepared by the Department of Treasury (Treasury) and reported to Parliament in the Annual Report on State Finances (ARSF) each year. The ARSF is audited under the Government Financial Responsibility Act 2000.

The ARSF brings together significant financial information for the Government of Western Australia and includes the consolidated financial results of all agencies1. In addition each agency included in these consolidated financial statements prepares and tables its own annual report which provides greater detail on its individual finances. Information in the ARSF is reported for the Total Public Sector and its three components as shown overleaf.

1 The ARSF does not include agencies which administer superannuation, private trust or fidelity funds and/or are excluded on the basis of ABS and Australian Accounting Standards classifications. These include the Public Trustee, public universities and their subsidiaries, GESB and other superannuation boards.

Other Financial Reporting and Audit Issues


Total Public Sector

General Government Sector

Consolidated Account

Public Financial Corporations

Public Non-Financial Corporations

Figure 1: Diagram of the Total Public Sector

General government sector – Public sector departments and agencies mainly engaged in the production of goods and/or delivery of services provided to third parties free of charge or at nominal charges well below cost. This sector includes government departments, statutory authorities providing public services and state training providers.

Public non-financial corporations – Corporations “engaged mainly in the production of goods and services for sale in the market and whose objective is to recover at least a significant proportion of operating costs through charges for their goods and services.”

These include the port authorities, power authorities, Housing Authority, Lotteries Commission, Water Corporation and Western Australian Land Authority.

Public financial corporations – Government controlled agencies “mainly engaged in financial activities, such as providing banking and insurance services.”

This group includes the Insurance Commission of Western Australia, Keystart Housing group, RiskCover and Western Australian Treasury Corporation.

It is notable that the largest 43 agencies by expenditure and the largest 28 agencies by net assets account for 96 per cent of these balances in the ARSF.

TimelinessA clear (unqualified) audit opinion was issued to the Treasurer on 20 September 2013. The audited ARSF was tabled in Parliament on 25 September 2013, meeting the statutory reporting deadline of 90 days after the end of the financial year.

Timely and efficient preparation of the ARSF by Treasury and its audit by us is dependent on agencies submitting accurate year-end financial balances to Treasury on time. It is of



concern that Treasury advised of 44 agencies making material changes to their balances in late August and early September, well after Treasury’s 24 July deadline for submitting their balances.

Western Australia’s Finances – Selected Key IndicatorsThe ARSF reports the State’s annual financial operations and financial position at year-end and explains significant variations from the prior year and from the annual budget estimates. We have supplemented the information contained within the ARSF with other information, graphed over eight years:

y Net Operating Result

y Infrastructure Renewal Ratio

y Cash Surplus/Deficit

y Debt Sustainability.

Net Operating ResultThe net operating result for the General Government Sector and the Total Public Sector are charted below. A large number of factors impact on the result including economic circumstances, interest rates, Commonwealth funding and legislation. However a surplus is generally an indicator of sound financial management and/or good budgeting.

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

3000

2500

2000

1500

1000

500

0

-500

Net Operating Result–– Total Public Sector

–– General Government

$ m

illio

n

Source: Tabled Annual Reports on State Finances

Chart 6: Net Operating Result from 2005-06 to 2012-13

Chart 6 shows that the net operating result for the total public sector was a deficit for 2012-13 although the general government sector remained in surplus.




Infrastructure RenewalInfrastructure assets include roads, ports, water and electricity assets and networks, hospitals and schools. In 2012-13 the value of non-financial assets for the Total Public Sector increased by 2.7 per cent, from $142.8 billion on 30 June 2012 to $146.6 billion on 30 June 2013.

The challenge to government is to maintain existing infrastructure and also develop and provide new assets to achieve the social, economic and environmental objectives of the State.

The infrastructure renewal ratio is an indicator of the rate at which existing infrastructure is being replaced and increased compared with the rate at which it is being used up. The ratio compares the annual expenditure on non-financial assets with the annual depreciation charge on assets. A ratio higher than 1:1 indicates that overall the State’s infrastructure is increasing.

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Infrastructure Renewal Ratio3.5

3.0

2.5

2.0

1.5

1.0

0.5

0


Chart 7: Infrastructure renewal ratios from 2005-06 to 2012-13

Chart 7 indicates that although infrastructure renewal is slowing, it remains well above the ratio of 1:1.

The infrastructure renewal rate is a high level indicator and caution is needed when interpreting the results. For example, this indicator does not inform on the extent to which maintenance of existing assets is prolonging their useful life.



Cash Surplus/DeficitThe cash surplus/deficit position, shown below, includes the net cash flows from operations (day to day activities) and from infrastructure investment. This cash measure is an indicator of the public sector’s need to borrow to meet outgoings.

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

2500

2000

1500

1000

500

0

-500

-1000

-1500

-2000

-2500

-3000

-3500

-4000

Cash Surplus/Deficit–– Total Public Sector

–– General Government

$ m

illio

n


Chart 8: Cash surplus/deficit from 2005-06 to 2012-13

Chart 8 shows an increasing deficit. The public sector is generating surplus cash from operating activities, with this resource providing part funding for infrastructure investment. However, the shortfall in cash means that it is increasingly necessary for both the general government sector, and the broader total public sector, to borrow to meet current levels of infrastructure investment.

Total Public Sector Debt and Debt SustainabilityThe ARSF, in Chapter 1, includes important information on net debt.

In Chart 9, we have reported another commonly used high level indicator relating to debt, the debt sustainability ratio. In this chart, the debt sustainability ratio is the value of borrowings and unfunded superannuation liability of the total public sector as a percentage of Gross State Product (GSP).

It should be noted that measuring sustainable debt is difficult as the ability to pay debts


involves factors such as economic growth, interest rates and the capacity of the State to generate surpluses in the future. As debt is repaid over a long period, these factors cannot be forecast reliably.

Since 2005-06 Total Public Sector debt has increased 160 per cent from $18.4 billion to $47.9 billion at 30 June 2013 due to both increases in borrowings and unfunded superannuation liability. Over the same period borrowings increased 210 per cent, from $12.8 billion to $39.7 billion. GSP only increased by 41 per cent.

Debt SustainabilityBorrowings + Unfunded Superannuation as a Percentage of Gross State Product

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

25

20

15

10

5

0

Source: Tabled Annual Reports on State Finances and Australian Bureau of Statistics

Chart 9: Debt sustainability ratios from 2005-06 to 2012-13Note: As ABS data for 2012-13 is not yet available, 2012-13 is based on a Treasury estimate of GSP.

Although the chart indicates that in 2013 the State is better placed to meet its debt obligations than in 2012, it shows a general decline over the eight years in capacity to service debt obligations. As State debt increases, the interest payments to service the debt will generally increase. This will impact on the State’s future net results and its ability to repay debt in the future.

Shared Services Decommissioning In 2012-13, thirty one agencies rolled out of the Department of Finance’s Shared Services Centre as part of the decommissioning program for the Centre. As finance and human resources processes move to agency control, existing responsibilities, accountabilities and financial control processes have changed.

During our audit of these agencies, we confirmed the complete and accurate conversion of information from the Centre to the agencies’ new systems and also assessed agencies’ revised financial and information system controls following roll-out. Although problems



were inevitably encountered by agencies and some errors were identified by our audit staff, in general no reportable data or system problems were identified by our audit teams.

During 2013-14 the remaining agencies are scheduled to roll-out, including several large agencies. All agencies will need to ensure that an adequate system of internal control over transactions is maintained during and after the transition period. Agencies will also need to maintain clear records to demonstrate that they have confirmed the completeness and accuracy of the data conversion and balances to their internal systems.

Statements of Corporate IntentTabling of annual Statements of Corporate Intent (SCI) after the beginning of the financial year to which they relate continues. Treasury advised that:

“In 2013-14 tabling of SCIs cannot occur prior to the release of the State Budget on 8 August 2013, as SCIs become public documents once they are tabled. Treasury will therefore prioritise analysis and facilitation of Treasurer’s concurrence following the release of the State Budget.”

However, at 30 September 2013, no approved SCIs for any of the 23 agencies had been tabled for 2013-14. By 31 October 2013, 11 had been tabled.

SCIs are a form of annual agreement between government and those agencies which operate at arm’s length from government. SCIs are therefore an important governance and accountability mechanism.

Agencies are required by their Act or regulations to draft the annual SCI for agreement with their Minister and the Treasurer. Negotiations can be part of the agreement process between the agency, the Minister and the Treasurer but the Minister is responsible for ensuring that the SCI is tabled in Parliament within 14 days of it being agreed.

Tabling requirements vary slightly but generally SCIs are either required or expected to be tabled before the commencement of the financial year or early in the financial year to which they relate. For the purposes of this report we used 30 September as the cut-off date. Where the Minister has not agreed or the Treasurer has not concurred then the latest draft SCI takes effect. However, tabling of the SCI would not take place until full agreement is reached.

The contents of SCIs can vary with agency legislation but generally they include:

y outline of objectives and major planned achievements for the next financial year

y nature and scope of functions proposed to be performed during that year

y performance targets and other measures by which performance may be judged

y outline of capital expenditure, proposed borrowings, pricing arrangements and dividend policy



y accounting policies that apply to the preparation of financial statements

y types of information to be given to the Minister, including periodic and annual reporting

y nature and extent of community service obligations to be performed, costing and funding of these activities and any compensation arrangements

y other matters agreed on by the Minister and the Board.

Table 7 shows the dates that SCIs were tabled in Parliament and highlights SCIs that were tabled before commencement of the financial year to which they relate.

Date tabled2013-14 SCI 2012-13 SCI

Corporatised entitiesHorizon Power – Regional Power Corporation Not tabled 14/08/2012Synergy – Electricity Retail Corporation Not tabled 14/08/2012Verve Energy – Electricity Generation Corporation Not tabled 14/08/2012Water Corporation Not tabled 27/09/2012Western Australian Land Authority (Landcorp) Not tabled 15/11/2012Western Power – Electricity Networks Corporation Not tabled 25/10/2012Statutory authoritiesChemistry Centre (WA) Not tabled 28/02/2012Forest Products Commission 16/10/2013 16/04/2013Gold Corporation Deemed 07/10/2013 28/06/2012Government Employees Superannuation Board Not tabled 27/09/2012Insurance Commission of Western Australia Not tabled 25/10/2012Lotteries Commission Deemed 07/10/2013 28/06/2012Racing and Wagering Western Australia 15/10/2013 07/08/2012Western Australian Land Information Authority (Landgate) Not tabled 11/09/2012Western Australian Treasury Corporation Not tabled 25/09/2012Port authoritiesAlbany Port Authority 31/10/2013 24/10/2012Broome Port Authority 31/10/2013 12/12/2012Bunbury Port Authority 31/10/2013 12/12/2012Dampier Port Authority Not tabled 12/12/2012Esperance Port Authority 31/10/2013 12/12/2012Fremantle Port Authority 31/10/2013 12/12/2012Geraldton Port Authority 31/10/2013 12/12/2012Port Hedland Port Authority 31/10/2013 12/12/2012

Source: Parliament – Tabled Papers

Table 7: Statements of Corporate Intent tabled in ParliamentNo approved 2013-14 SCIs were tabled in Parliament by 30 September 2013, while 11 were tabled by 31 October 2013. The Under Treasurer advised that late tabling of the State Budget on 8 August 2013 would impact on finalisation of SCIs.



We have reported delayed or non-tabling of SCIs every year since 2000.

Last year in Report 10, November 2011, we reported that the Department of Treasury (Treasury) was coordinating two separate (but related) projects that were considering ways of improving the quality and compliance of SCIs with legislative requirements. In August 2012, Treasury provided the following update, though no timeframe or deadlines were given:

“Due to the Treasurer’s concurrence role, the Department of Treasury observes the variability of content and approval processes of SCIs across different agencies. For this reason, Treasury is coordinating a review of the SCI process in collaboration with government departments that support portfolio Ministers in this role. This review is examining the underlying reasons for non-compliance with legislative requirements and has the objective of providing appropriate incentives to ensure SCIs are tabled in Parliament within legislated time frames. This review is being undertaken as part of a wider investigation into the implementation of umbrella legislation for government enterprises, which was a recommendation of the Economic Audit Committee Report.”

In July 2013, the Under Treasurer advised that “Treasury continues to progress the review of SCIs that was undertaken as part of the umbrella legislation project.” No timeframe for its conclusion was indicated.

RecommendationsStatements of Corporate Intent should be tabled within timeframes required by the relevant legislation and in any event by the start of the financial year to which they relate.

The Department of Treasury should finalise its review of the SCI process in time for new procedures to be implemented for the 2014-15 SCIs.

Restructure of AgenciesDuring 2012-13 there was only one agency restructure. The Fire and Emergency Services Authority of Western Australia was wound-up effective from 31 October 2012 and the newly created Department of Fire and Emergency Services was established. A final audit of the Authority was completed. In addition a new sub-department, the State Emergency Management Committee Secretariat, was created from 1 July 2013.

From 17 May 2013 the Department of Indigenous Affairs was renamed the Department of Aboriginal Affairs and the Department for Child Protection was renamed the Department for Child Protection and Family Support.



From 1 July 2013 a number of agency restructures came into operation. Where necessary, conversion of data and balances to the new agencies will be assessed for completeness and accuracy and the control environment reviewed for changes made to accommodate the revised structure of the agencies. Final audits of agencies abolished at 30 June 2013 were conducted as shown below.

Final audits at 30 June 2013 New agencies to be audited from 1 July 2013Department of Environment and Conservation

Department of Parks and WildlifeDepartment of Environment Regulation

Department of Local GovernmentDepartment of Local Government and Communities

Department for CommunitiesDepartment of Regional Development and Lands

Department of Regional DevelopmentDepartment of Lands

Table 8: Agency restructures at end of the 2012-13 financial year



A number of changes in accounting treatment occurred during the year that significantly impacted on agency financial results. We also noted some important financial transactions that occurred across the public sector.

During the last few years the auditing profession has generally sought to improve transparency about the audit process and about important issues considered by the auditor during the audit. In line with these developments, this part of the report details key financial reporting issues noted during the audits of individual agencies that may be of interest to Parliament. Some of this information may also be reported in each agency’s tabled annual report but is summarised here for the convenience of Parliament. The information is in two sections:

y Key financial reporting issues addressed during the audits

y Selected significant key financial transactions, results and ratios.

Key Financial Reporting Issues Addressed During the AuditsRevised Health Funding ArrangementsUnder the National Health Reform Agreement 2011, a nationally consistent approach to activity based and block grant funding was implemented in all States in 2012-13. This significantly revised the funding arrangements for the Western Australian public health sector, with most funding now allocated from a National Health Funding Pool. In the past, this Commonwealth funding was received by the Department of Treasury and provided to WA Health as appropriations.

Total appropriations in 2012-13 for the Department of Health, which is primarily used to fund the Department, Metropolitan Public Hospitals and WA Country Health Service, have decreased by $1.0 billion compared to the prior year while total direct Commonwealth funding increased by $1.2 billion. Similarly, total appropriations for the Mental Health Commission decreased by $122.2 million while total Commonwealth funding increased by $146.6 million. The vast majority of this movement was due to the change in funding arrangements.

In planning for the audit of these arrangements, my Office consulted with the Departments of Health and Treasury and with relevant Commonwealth agencies. I issued a clear audit opinion for Western Australia’s new State Health Funding Pool Account.

Key Financial Reporting Issues at Individual Agencies


Financial Reporting – Audit Focus for 2012-13For 2012-13, areas identified for specific audit focus included:

y Correct decisions being made regarding the capitalising or expensing of costs

y Whether changes to depreciation rates and the estimated useful life of assets were based on appropriate assumptions

y Whether accounting estimates, including asset impairment, were based on sound information and assumptions

y Correct cut-off of expenditure at year-end.

Various issues were identified during our audits, including insufficient analysis by agencies to correctly determine whether costs should be expensed or capitalised, and failure to identify all accounts payable at year-end.

Listed below are some of the significant and challenging issues that we considered and resolved during our audits.

Reduced Depreciation Expense for Buildings – Department of EducationIn October 2012, Treasury advised the Department of Education that Cabinet had agreed to a revision of the estimated useful life of school buildings from 40 to 50 years and instructed the Department to make the change. This had the effect of reducing depreciation expense by approximately $37 million. Neither the Department nor Treasury could provide any documentation to explain the rationale for the change. Subsequently, a documented rationale was prepared and provided to Audit. Although we concurred with the revised estimate, we recommended that all future significant changes to accounting estimates be supported by appropriate robust research and associated documentation.

Decommissioning of hospitalsThe proposed decommissioning of Princess Margaret Hospital and other hospitals in 2014 and 2015, required the remaining useful life of these buildings to be reduced from 2012-13 with an associated increase in the rate of depreciation by WA Health. The required change to depreciation was not initially recognised but was identified and amended as part of the audit process. The change resulted in depreciation expense increasing by $48 million.



Capitalisation of Pre-Operational Service Costs – Fiona Stanley Hospital Following a query from the then Director General, we performed a detailed audit of pre-operational costs of Fiona Stanley Hospital. We concluded that $46.4 million recorded as a work in progress asset should be expensed and the financial records were amended accordingly.

Delayed Transfer of Road from the Commissioner of Main Roads to the Local Government SectorPeriodically Main Roads transfers roads to local governments which are no longer considered to be main roads. The Eneabba-Coolimba road was ready for transfer to the Shire of Carnamah during 2012-13. Main Roads consulted Treasury about the transfer of this road, as is standard practice in such situations. When considering these transfers, Treasury has regard to the net operating balance impact of the transfer and any upcoming offsets by way of road transfers to Main Roads from local governments or the private sector. Any discretion that exists in the timing of a transfer can then be used to alter the period in which the transfer proceeds. Subsequently, in October 2012 during the Mid-Year Review process Treasury requested that the transfer be postponed. This had the effect of delaying the related expense of $10 million that would have been recorded for the Commissioner of Main Roads and in the Annual Report on State Finances. We accepted this treatment.

Treasury has advised that the transfer and related expense is now scheduled for 2014-15.

Western Australian Tourism Commission – Capitalisation of Campaign Production CostsFor 2012-13 the Commission changed its accounting policy for the cost of producing media campaigns that will run for more than one year, so that they are capitalised and reported as an intangible asset. Previously these costs were expensed. The effect of the change was that intangible assets to the value of $1.64 million were recognised in 2012-13.

Management provided sufficient evidence to Audit to support this change in accounting policy. However, although the Commission advised us that they supported the revised policy when it was initially proposed in mid-year, the change was only researched in the second half of the financial year and confirmed after the 30 June 2013 year-end. We recommended that in future any changes to accounting policies be made at the time of setting the budget and prior to the beginning of the reporting period to which they will apply, unless exceptional circumstances exist.



Electricity Generation Corporation (Verve Energy) – Valuation of assetsVerve Energy acquired Vinalco Energy Pty Ltd (Vinalco) during 2012-13. Accounting for the acquisition required that the fair value of the assets held by Vinalco be determined at the acquisition date. These assets included the partly refurbished Muja A and B power plants and intangible assets that had not been previously recognised. As neither the power plants nor the intangible assets are traded in open market, and there was uncertainty regarding Government funding for the completion of the refurbishment, Verve Energy had to make various assumptions in valuing these assets. A significant part of our audit was spent assessing the assumptions made during the valuation process. The valuation determined that there was an impairment loss of $75.5 million at Verve Group level.

Selected Significant Key Financial Transactions, Results and RatiosThis section of the report provides a summary of selected financial transactions and outcomes, as well as key financial ratios that are commonly used to analyse the financial health of agencies.

Selected Significant Financial TransactionsListed below are selected significant transactions and balances noted by our audit teams. As mentioned earlier, many of these items may already have been disclosed in individual agency annual reports but are also highlighted here for the information and convenience of Parliament. Our listing of these items is not intended to imply that we have a residual concern with these transactions.

Assets

y Western Australian Treasury Corporation advanced a further $3 billion in loans to agencies, drawing on $1.2 billion of its investments and borrowing a further $1.7 billion.

y The Construction Industry Long Service Leave Payments Board’s assets at 30 June 2013 exceeded its liabilities. This reversed a negative assets position which has existed at year-end in four of the last five years – 2012, 2010, 2009 and 2008. A clear audit opinion has been issued for 2012-13 without a Matter of Significance paragraph.

y The Department of Education’s buildings increased by $620 million (8 per cent), largely as a result of completed projects including two new high and fifteen new primary schools, and additions and improvements which included those for the Building the Education Revolution program as it wound down.

y Department of State Development infrastructure increased by $147 million due to the Ord Infrastructure project. The Ord irrigation area expansion project included expenditure on irrigation channels, related assets, roads and a workers’ camp.



y Department of Training and Workforce Development has increased its provision for doubtful debts by $870 000 due to significant long outstanding debts, some of which related to the period prior to the de-merger from the Department of Education in 2009.

y Government Employees Superannuation Board’s net position improved to $130 million compared to negative $124 million in 2012 mainly due to higher than expected investment return. Funds under management increased 25 per cent to $16.2 billion.

y Landgate (Western Australian Land Information Authority) purchased a further $16.2 million holding in National E-Conveyancing Development Limited (NECDL), a majority government owned company which is developing a national electronic conveyancing system. The acquisition, coupled with a fair value increase in the shares, increased the value of the investment to $32 million.

y The Police Service processes building re-valuations at the beginning of the financial year rather than the generally accepted across government approach of processing these re-valuations at year-end. Management advised that this was due to system limitations. Although in this instance this approach was not inconsistent with accounting standards, building values were approximately $14 million lower at 30 June 2013 than under the across government approach. This required adjustment in the Annual Report on State Finances to ensure consistent accounting treatment.

y Department of the Attorney General property, plant and equipment increased by $44 million mainly due to the redevelopment of the Kalgoorlie courthouse, and construction of the Kununurra courthouse and the Carnarvon Police and Justice Complex.

y Department of Corrective Services property, plant and equipment increased by $115 million mainly due to the West Kimberley Regional Prison and Acacia Prison extensions.

y Western Power property, plant, equipment and intangibles increased by $801 million due to capital additions of $1.048 billion offset by depreciation and primarily funded from additional borrowings of $713 million. Provisions for rehabilitation and asbestos removal costs associated with network assets increased by $10 million.

y Metropolitan Redevelopment Authority capital expenditure included $108 million on Elizabeth Quay, Riverside and Perth City Link.

y Department of Environment and Conservation reported a decrement of $592 million in the valuation of its national parks and forests. This was mainly due to a general decline in rural land values as well as increased recognition during the re-valuation process of the restricted nature of the crown reserves, and of conservation and clearing restrictions.



Expenditure

y Department of Finance’s revenue and expenses relating to the Building the Education Revolution (BER) program decreased by approximately $100 million as this program wound down.

y Department of Treasury’s supplies and services expenses decreased by $43 million (30 per cent) primarily due to completion of Perth Arena, partially offset by costs for Acacia Prison expansion and Perth Major Stadium.

y Water Corporation costs included the expensing of projects that are not proceeding, including the West Pilbara Desalination Plant ($8 million) and Headland West Canning Borefield Investigation ($5 million). This discontinuance of research and development projects can occur at a number of government agencies.

y Public Transport Authority grants and subsidies increased by $43 million (11 per cent) mainly due to additional bus service kilometres, escalation in bus contract costs and increased labour costs and fuel prices.

y WA Country Health Service employee expenses increased by 10 per cent to $797 million mainly due to increased salary rates and district allowances, superannuation back payments and a 4 per cent increase in full time equivalent staff.

y Department of the Attorney General employee benefits expense decreased by $115 million compared to the previous year. This was primarily due to changes in the discount rates used for the annual actuarial assessment of the judicial pension liability in 2011-12.

y Lotterywest returns to beneficiaries increased by 5.8 per cent due to increased sales revenue, partly due to Powerball and Oz Lotto jackpots.

y Disability Services Commission increased its funding to non-government service providers by $52.8 million mainly d

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